- An expired fixed rate loan will likely roll over to a variable loan
- The fixed rate cliff is forecast to hit around September this year
- Over one in two Aussies wished they fixed their low rates for much longer
Fixed rate home loans have recently been under the microscope as the widely reported “fixed rate cliff” approaches.
While the Reserve Bank of Australia (RBA) set interest rates at historic lows of 0.1%, many Australians took to home ownership at the prospect of the cheapest home loan interest rates on record.
Fast forward a few years, and interest rates have risen sharply, with the latest 25 basis point rise bringing the official cash rate to 4.10%.
Fixing your home loan to record lows is an attractive prospect, but it does seem to have led to the phenomenon of the fixed rate cliff.
What is the fixed rate cliff?
This is when home loan interest rates that were fixed to pandemic lows expire and revert to higher variable rates. Given the historic interest rate low was 0.1%, and the latest now 4.1%, the difference in mortgage repayments will be night and day.
That difference is four percentage points apart, or to put it starkly, 41 times higher than the Covid low, or to put it even more starkly, 4,100% higher than when the cash rate was at its lowest.
In April this year, The Property Tribune reported that more than half of all fixed-rate loans revert to higher variable rates, according to Aussie Home Loans.
The brokerage said one in five mortgage holders will have their fixed-rate loan term end in the next three months (from April), with 50.22% expiring in September.
Chief Distribution Officer, Aussie Home Loans, Brad Cramb then said:
”Fixed Rate Mortgage holders are likely to be some of the most vulnerable in this situation as they roll off their current rate, requiring added expertise to assist their financial situation.”
More than three in four keen to lock rates in
Despite the daunting sound of the ‘fixed rate cliff‘, Mozo‘s banking and interest rate expert, Peter Marshall, told The Property Tribune that very few people have been fixing home loan interest rates over the last year or so as rates rose sharply.
“However that is starting to change as fixed rates are being cut again. As long as people know what happens at the end of their fixed period and they plan for that, there’s no reason to not consider a fixed rate period.
“Those that might be struggling to adjust to higher rates now after several years of an amazingly low fixed rate have saved a lot in interest while that rate was available to them.”
Mozo’s January survey found that the vast majority of Australians would fix their mortgages again, with the breakdown seeing one in five not minding the higher fixed home loan rates.
Mozo consumer survey, January
- 20% Yes, I liked the predictable payments, even if it means a slightly higher interest rate
- 32% Yes, I think interest rates are going to continue to increase for a number of years and want to lock in a rate now
- 25% Yes, but only for 1 year until this time of economic uncertainty is over
- 12% No, I did not like being able to refinance or change my loan
- 11% No, variable interest rates are probably going to decrease and I don’t want to lock in a higher rate
What will happen when my fixed rate loan expires?
Home Loan Experts‘ Otto Dargan told The Property Tribune that when a fixed rate loan expires, “Lenders often roll the loan back to variable but with a terrible discount.”
“Borrowers end up paying much more than a new customer would, so it’s important to negotiate or shop around when the fixed rate expires. Don’t just accept what they give to you.”
Otto Dargan, Home Loan Experts Founder
The power of hindsight is 20/20, with Mozo’s survey finding over one in two Australians wished they had fixed their home loans for five years.
Mozo consumer survey, January
- 53% Yes I wish I fixed for five years
- 24% Yes I wish I fixed for four years
- 15% Yes I wish I fixed for three years
- 9% Yes I wish I fixed for two years
This begs the question: How long should a mortgage be fixed for? There is no right answer, said Dargan.
The pros and cons of fixed home loans
Fixed home loans may have strict conditions, with Dargan noting that,”There are often high penalties for paying the loan off early, refinancing, selling the property or making extra repayments.
“So see it as a fixed contract that you cannot break. Sometimes these costs can be tens of thousands of dollars.”
Otto Dargan, Home Loan Experts Founder
Certainty is one of the fixed home loan benefits, but there may be another route, according to Marshall.
“Fixing can help you get certainty about the level of your repayments for the term of the fixed rate. However, if rates start going down again an option that looks reasonable now could seem expensive in a few years.
“Predicting the direction of interest rates over even 2 or 3 years can be hard to get right, so splitting your loan to part fixed and part variable can give you the best of both worlds, with limited exposure to rate fluctuations but some benefit if variable rates do fall.”
Dargan likewise noted that splitting a loan can give people ‘the best of both worlds’.
“Typically people have a small variable portion which enables them to have some flexibility to make extra repayments and an offset account,” added Dargan.
Can I just refinance?
That depends on your situation, however, a growing number of Australian borrowers may be unable to refinance.
As the cash rate was announced earlier this week, Compare Club Chief Operating Officer Brendan See said, “We’re still seeing around 20% of people looking to refinance coming to us with an LVR (Loan-to-Value ratio) of 80% or more, which locks some homeowners into mortgage prison as they cannot afford to refinance.”
Marshall noted that, “People with LVR’s under 80%, and on a variable rate loan, can refinance any time they see a better rate with only potential fees for discharging their mortgage and applying for a new mortgage to consider.
“If the borrower is on a fixed rate mortgage, the borrower will need to consider any break fees as these might also outweigh the savings, and it will be better to wait until the fixed term ends before considering refinancing.”
Marshall also warned that a new lender will have their own loan assessment criteria and process, and you will need to gain their approval for a home loan.
“This is particularly important if your financial situation has changed since you got your loan – is your household getting less regular income for any reason or have your expenses increased?” said Marshall.
It is also important to note that an LVR above 80% will likely see the need for Lenders Mortgage Insurance (LMI), noted Marshall.
“That insurance does not transfer to a new lender, so if the loan is still above 80% of the value of the home, borrowers would need to pay for another LMI policy which could outweigh any savings achieved by getting a lower interest rate.”
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