What Happens When Your Fixed Rate Ends?

What Happens When Your Fixed Rate Ends?

Coming off a fixed-rate mortgage can be a bit of a shock, especially if you’ve been enjoying those ultra-low rates from a couple of years back. For many Australians, their fixed rates are set to expire in the next 12 months, and with the current rates sitting around 6%, that’s quite a jump from the 2% or so they might have locked in previously. So, what exactly does it mean to roll off a fixed-rate loan, and what options are available to soften the impact? Let’s dive in and break it all down.

What Happens When a Fixed Rate Ends?

When your fixed rate ends, your loan doesn’t just disappear; it rolls over to a variable rate. This rate is usually the lender’s standard variable rate, which right now is a lot higher than the fixed rates that were available in recent years. For those who fixed their loans at around 2% in 2021 or 2022, moving to a 6% rate can feel like a big financial hit, almost like a “mortgage cliff.”

Here’s a quick look at how that difference plays out in real numbers. Let’s say you have a $500,000 loan with a 25-year term. At a 2% interest rate, your monthly repayments might have been around $2,120. If that jumps to a 6% variable rate, you could be looking at monthly repayments closer to $3,220—a significant increase! For many households, that extra $1,100 a month could stretch the budget uncomfortably.

How Did We Get Here?

Interest rates have been on the rise due to inflationary pressures, and the Reserve Bank of Australia (RBA) has been increasing the cash rate to help cool the economy. While fixed-rate borrowers were protected from these hikes, they’re now facing a new reality as their terms end and they shift to the current market rates. And with rates likely to hold at these higher levels for a while, it’s essential to plan for this transition.

What Are Your Options When the Fixed Rate Ends?

The good news is that you do have options. Here are a few strategies to consider that might help make this transition easier:

• Consider Refinancing: If you’re rolling over to a high variable rate, refinancing could be a good move. With refinancing, you could switch to a different lender or negotiate a lower rate with your current lender. Many lenders are keen to attract new customers, which might mean they’ll offer a more competitive rate to win your business. When refinancing, consider if you want to lock in another fixed rate or stick with a variable one. Fixed rates can offer peace of mind, as you’ll know exactly what your repayments will be each month. However, the trade-off is that you won’t benefit if rates go down. Variable rates, on the other hand, fluctuate with the market, which could be beneficial if rates drop, but it also means your repayments could go up if rates rise.
• Split Your Loan: If you’re unsure whether to go with a fixed or variable rate, a split loan might be worth exploring. With a split loan, part of your mortgage is on a fixed rate, and part is on a variable rate. This way, you can enjoy the security of a fixed rate on a portion of your loan, while still having the flexibility to make extra payments or benefit from any potential rate drops on the variable portion.
• Make a Plan for Higher Repayments: If you do end up with a higher variable rate, it’s essential to budget for those increased repayments. Start by reviewing your household budget and see where you can make adjustments to manage the extra costs. Even small changes, like cutting back on subscriptions or reducing discretionary spending, can add up over time. It might also be worth building a buffer or “rainy day” fund if you haven’t already. This way, you’ll have some extra savings to fall back on if rates rise further or if unexpected expenses crop up.
• Speak to Your Mortgage Broker: Annette Tothill Finance can help you understand your options and find a solution tailored to your needs. Brokers like Annette have access to multiple lenders and can guide you through the refinancing process, comparing rates and fees to find the best fit. They can also help explain the details of split loans, offset accounts, and any other features that might help make your mortgage more manageable.

How to Prepare for the Rate Change

Transitioning from a low fixed rate to a higher variable rate doesn’t have to be overwhelming. Here are a few proactive steps you can take now to prepare:

• Crunch the Numbers: Use a mortgage calculator to estimate what your repayments will look like at the new rate. This will give you a clearer picture of the financial impact and help you adjust your budget accordingly.
• Increase Your Payments Early: If you’re currently on a fixed rate but know it will end soon, consider increasing your repayments now to get used to the higher amount. This strategy can help ease the transition and may even reduce your loan balance faster, saving you interest in the long run.
• Pay Down Extra Debt: If you have other debts, like credit cards or personal loans, consider paying them down before your mortgage rate jumps. Reducing other financial commitments can make it easier to handle the higher mortgage repayments.
• Keep an Eye on Interest Rates: Interest rates can change, so stay informed about the RBA’s rate movements and forecasts. This knowledge will help you make timely decisions if and when there’s an opportunity to refinance at a lower rate.

Final Thoughts

Coming off a fixed-rate mortgage, especially from a historically low rate, can be an adjustment. It’s natural to feel uncertain about what lies ahead, but with a bit of planning and the right advice, you can navigate this change smoothly. A mortgage broker like Annette is a valuable resource during this period, offering insights and access to a wide range of loan products, which could help you avoid that “mortgage cliff” feeling.

Ultimately, it’s about finding the solution that suits your financial situation best. Whether that means refinancing, splitting your loan, or adjusting your budget, there are ways to make your mortgage work for you—even in a high-rate environment. By taking control and exploring your options, you’ll be well-prepared to handle the shift and keep moving forward with confidence.