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What to do if your fixed rate is expiring soon?

Many borrowers, either by good luck or by being decisive during 2020-21, were able to lock fixed rates in the low 2% or even in the high 1% range. According to industry data, a majority of those fixed rates will be ending in 2023 with the peak in May – July 2023.

Once your fixed loan rolls over to a variable rate a lot of those borrowers will experience an interest rate in the 5-6% p.a. range which is a big jump.

For example, if you took out a $500,000 3 year fixed rate mortgage at 2% your current principal and interest repayment will be approximately $1848 per month. This is based on a 30 year loan term.

If you roll over to a variable rate of 5.70% p.a. your repayment will increase to $2,793 per month.

That is an increase of $945 per month!

A common question I hear is “What do I do when my fixed rate ends”? A jump of $945 per month in home loan repayments is going to put a hole in most people’s budgets. There are some steps you can take to minimise the impact. Here’s what you should do:

– Don’t panic

Your lender stress-tested your budget for a 3% jump in the interest rate before they approved your home loan. If you want to minimise the impact – you need to keep a clear head

– Talk to your broker about re-pricing your loan

I recommend doing that around 6 weeks before your fixed rate is due to end. Why 6 weeks? – By starting this process 6 weeks before the fixed expiry date it gives you enough time to complete a refinance to another lender if required. You should time the settlement of the refinance to occur the day after your fixed rate ends.

There are different types of resetting to variable interest rate clauses. At some lenders, borrowers roll over to a variable rate with the minimum discount. At the time of writing, this could mean a rate of 6-7% p.a. At some other lenders, when the fixed rate ends the borrower will roll over to a pre-negotiated discounted variable rate. Regardless, a broker may be able to get you a lower variable rate with your existing lender. Mortgage World Australia is more than happy to do this for you.

If not, we might be able to refinance you once your fixed rate ends and get you a more competitive variable rate than you would have gotten otherwise – reducing your repayments.

– Plan Ahead for Rate Changes

Adjust your budget now to get used to the variable rate when it resets. With gaps between the current variable and fixed rates – expect that you’ll quickly max out your additional mortgage repayments for the year (which are often capped at $10,000).  So be sure to move that extra money into a savings account after that. Then, when the fixed term expires, you’ll be able to move that money into your mortgage account too.

That way you’ll have a buffer of extra cash saved up that will help reduce your mortgage or can help you if things get tight. And you’ll avoid the worst of the shock from when your mortgage resets from fixed to variable

– Gather Documentation

Regardless of the option you choose, be prepared to provide updated documentation to your lender, including proof of income, assets, and other financial information. This will facilitate a smoother approval process.

Start Early

Don’t wait until the last moment to explore your options. Start the process well in advance of your fixed-rate period ending to allow sufficient time for research, comparison, and decision-making.

As your fixed-rate mortgage term nears its expiration, take proactive steps to ensure you make the best decision for your financial situation. Understand your options, review your mortgage terms, and plan ahead for any potential changes. If necessary, seek professional advice from a mortgage broker or financial advisor to make an informed decision that aligns with your long-term homeownership goals.

Contact us today! We can help you with any options you want!