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Typical borrowers facing this year’s fixed-rate mortgage cliff will have to pay about $2700 more a month if they do nothing and are rolled on to their lender’s standard variable rate, says RateCity which monitors home loans.
But by refinancing to one of the lowest variable rates, they could reduce the increase to just $1600 a month – saving just under 40 per cent.
This is based on an owner-occupier repaying a $1 million principal and interest fixed loan. The example assumes the Reserve Bank of Australia will increase the base rate from 3.1 per cent to 3.85 per cent by May in line with Westpac and ANZ forecasts.
The figures assume the borrower will be coming off a two-year, 1.92 per cent fixed rate on to a revert rate of 7.16 per cent.
The same borrower, by refinancing to one of the lowest variable rates of 5.25 per cent, could reduce monthly repayments to about $5900, says RateCity.
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Strategies for those facing the fixed rate cliff include:
- Contact your lender or mortgage broker at least two months before your rate matures to discuss options. Refinancing continues to hit record highs as those applying for new loans falls, says Nerida Conisbee, chief economist for Ray White Real Estate.
- Find out the revert rate and negotiate a reduction. The revert rate is typically the standard variable rate for that product and is often much higher than discounted rates offered to new borrowers. Use what the lender is offering new borrowers as a benchmark. “Many lenders will offer better rates to borrowers with more equity in their house or an unblemished repayment history,” Crellin adds.
- Start saving to create a buffer or pay down more of the variable rate if the loan is split. “Most fixed loans have caps on extra repayments, so find out what they are,” Tindall says. “If you hit the cap, you can build up your war chest in a savings account.”
- Consolidate and pay down debt, such as car loans and credit card balances. It will be easier to control one recurring debt payment with one interest rate, suggests Crellin.
- Extend the term of your loan back to the original term of, say, 30 years even if you’ve been paying it off for five years. Crellin says it means lower monthly repayments but more over the life of the loan.
- Consider refinancing options but beware the additional costs, such as mortgage discharge fees, valuations, break costs and legal fees. There’s also lender’s mortgage insurance if your equity is less than 10 per cent. Competing lenders are offering cash incentives of up to $10,000, depending on loan size. Tindall adds: “Owner-occupiers who own 30 per cent or more of their homes are in the driver’s seat when it comes to rates. Use this advantage to haggle with your existing lender, or if you are planning a switch, your new one.”
- Do a budget to estimate whether you can afford the new interest rate. This involves tallying expenses and calculating remaining cash flow. It enables you to identify where money is being spent and where cutbacks can be made.
- Review discretionary spending, such as credit card debts, eating out and multiple subscriptions. Alternatively, consider lowering costs by changing utility and phone providers.
- Consider ways to increase earnings, such as renting out part of the property, starting a side business or asking for a pay rise.
- If you fear repayments will still be too high, contact your lender’s financial hardship team. “A trusted broker is a good first port of call,” adds Tindall. “If you have trouble making the repayments, call the lender as soon as possible.”
This is an extract from an article written by Duncan Hughes for Australian Financial Review, published on 26 January 2023.
Read the full story: Fixed rate borrowers face ‘extra hit of almost $3000 a month’ - Australian Financial Review
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