Navigating the Transition from Fixed to Variable Mortgage Rates
Strategies and Support for Borrowers Facing Rising Interest Rates
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.
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. 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.
Contact Carrick Aland’s award-winning Wealth Planning team on 1300 466 998 or visit carrickaland.com.au/wealth-planning/.
This information is prepared by Bridges Financial Services Pty Limited ABN 60 003 474 977 AFSL 240837 (Bridges). Bridges is an ASX Market Participant and part of the IOOF group of companies. This report is prepared by the IOOF Research team for: Bridges Financial Services Pty Limited ABN 60 003 474 977 AFSL 240837, Consultum Financial Advisers Pty Ltd ABN 65 006 373 995 AFSL 230323, Elders Financial Planning ABN 48 007 997 186 AFSL 224645, Financial Services Partners ABN 15 089 512 587 AFSL 237 590, Millennium3 Financial Services Pty Ltd ABN 61 094 529 987 AFSL 244252, RI Advice Group Pty Ltd ABN 23 001 774 125 AFSL 238429, Shadforth Financial Group Ltd ABN 27 127 508 472 AFSL 318613 (‘Advice Licensees’). The Advice Licensees are part of the IOOF group comprising IOOF Holdings ABN 49 100 103 722 and its related bodies corporate (IOOF group). The Advice Licensees and/or their associated entities, directors and/or employees may have a material interest in, and may earn brokerage from, any securities or other financial products referred to in this document or may provide services to the company referred to in this report. The document is not available for distribution outside Australia and may not be passed on to any third person without the prior written consent of the Advice Licensees. The Advice Licensees and associated persons (including persons from whom information in this report is sourced) may do business or seek to do business with companies covered in its research reports. As a result, investors should be aware that the firms or other such persons may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as a single factor in making an investment decision. The document is current as at the date of issue but may be superseded by future publications. You can confirm the currency of this document by checking the intranet site (links below). The information contained in this report is for the sole use of advisers and clients of AFSL entities authorised by the Advice Licensees. This report may be used on the express condition that you have obtained a copy of the Advice Licensees Financial Services Guide (FSG) from their respective website. Disclaimer: The information in this report is general advice only and does not take into account the financial circumstances, needs and objectives of any particular investor. Before acting on the advice contained in this document, you should assess your own circumstances or seek advice from a financial adviser. Where applicable, you should obtain and consider a copy of the Product Disclosure Statement, prospectus or other disclosure material relevant to the financial product before making a decision to acquire a financial product. It is important to note that investments may go up and down and past performance is not an indicator of future performance. The contents of this report should not be disclosed, in whole or in part, to any other party without the prior consent of the IOOF Research Team and Advice Licensees. To the extent permitted by the law, the IOOF Research team and Advice Licensees and their associated entities are not liable for any loss or damage arising from, or in relation to, the contents of this report. For information regarding any potential conflicts of interest and analyst holdings; IOOF Research Team’s coverage criteria, methodology and spread of ratings; and summary information about the qualifications and experience of the IOOF Research Team please visit https://www.ioof.com.au/adviser/investment_funds/ioof_advice_research_process.
