Tips to help with surviving the fixed rate cliff
Written and accurate as at: Oct 13, 2023 Current Stats & Facts
The story is familiar to most of us by now. Last year’s spike in inflation prompted central banks around the world to rethink their loose monetary policy settings. In Australia, interest rates shot up rapidly, delivering a shock many households weren’t prepared for.
Variable rate borrowers have had to deal with their loan repayments rising almost every month. But those who fixed their loans at historically low rates face a different kind of predicament.
Having been insulated from the RBA’s rate hikes for so long, this cohort will be thrown into a vastly different — and potentially punishing — interest rate environment.
According to property research firm CoreLogic, the average borrower could see their repayments increase by around 60% overnight.1
The RBA puts the number of fixed rate loans set to expire this year at around 880,000, with a further 450,000 expected to wrap up in 2024.2 If your fixed rate is coming to an end and you're worried about what’s on the other side, here are some tips to help you with coping.
Weigh up your loan options
First of all, it can be useful to take a step back and consider your options. For most people coming off a fixed rate, this might include:
- Roll over to a variable rate loan
- Re-fix your loan at your lender’s current rates
- Split your loan between a variable and fixed rate
- Refinance to another lender
The revert rate — that is, the variable rate your loan will roll over to once your fixed term ends — will likely be several percentage points higher than the one you’re currently paying. The good news is that you’re under no obligation to stick with your lender if you believe there are cheaper rates elsewhere (assuming you meet serviceability requirements).
Spend some time comparing other options on the market, and be prepared to refinance if you spot a better deal (and are eligible for it). You might even find your lender is willing to offer you a lower rate just to get you to stick around.
If you’re intent on re-fixing your loan, it may be worth considering the interest rate outlook first. Yes, it could work to your advantage if rates keep rising. But if economic conditions shift and rates begin to fall, you might be stuck paying more than you would be if you had opted for a variable rate instead.
Look for ways to ease the strain on your budget
Many Australians are engaging with their finances in a way they hadn’t before the current cost of living crisis hit. This can look different from household to household, but often it boils down to being more mindful when it comes to spending.
Tracking your spending can open your eyes to any unnecessary purchases and motivate you to make necessary adjustments. This can be done using pen and paper, a spreadsheet, or one of the many budgeting apps that are available to download.
It might also be worth looking at your utilities and insurances to see if you’re paying more than you need to be. When it comes to energy, the Government’s Energy Made Easy website can help you navigate the market and potentially find a cheaper plan.
Reach out to your lender for support
There’s no shame in saying “I can’t afford this at the moment” or “I can’t go out tonight” — especially when so many other people are probably in the same boat — but you can only tighten your belt so much before your options start wearing thin.
If you find yourself struggling to service your mortgage, consider reaching out to your lender (it can be better for everyone if you do this sooner rather than later). They should be able to connect you with their hardship team, who can assess your situation and provide tailored support.
Depending on your circumstances, this might mean changing the terms of your loan or temporarily pausing your repayments. Just keep in mind that if you do freeze your repayments, your lender will continue to charge interest and you could wind up paying more over the life of your loan.
Sources
1 https://www.corelogic.com.au/news-research/news/2023/are-we-there-yet-a-fixed-rate-cliff-update