There’s a lot of talk in the media right now about a so-called ‘fixed rate cliff’ coming in 2023. If you’re wondering what it’s all about and whether it will impact you, there’s a few things you need to know about the year ahead.
What does the ‘fixed rate cliff’ mean?
For Australian home owners who purchased during 2020 and 2021, when interest rates hit record lows, opting for a fixed rate looked very attractive. (If you’re just starting out, read this article for a breakdown of fixed vs. variable rates.) According to CoreLogic, fixed rate borrowing peaked at 46% of total home loans in July 2021 – right when interest rates were in a very sweet spot for borrowers.
As we all know by now, that sweet spot didn’t last. Borrowers on variable rates have been knocked around by continued rate rises, with more anticipated in 2023, while those who fixed during the pandemic have enjoyed a (temporary) reprieve.
In its Financial Stability Review, the Reserve Bank of Australia (RBA) warned that two thirds of these fixed rate loans are expected to expire in 2023. This means borrowers are predicted to see a significant increase in their home loan repayments by 3-4 percentage points – aka, the ‘fixed-rate cliff’ you’ve been hearing so much about.
If your fixed rate is set to expire in coming months, the worst thing you can do is nothing at all. For example, if you fixed at 2%, and you’re then moved onto the lender’s variable rate of 5.2%, the sudden change to your repayments will come as a rude shock.
Instead of waiting to automatically land on your lender’s variable rate, follow these three steps to ensure there are no surprises.
Contact your lender
Proactively contact your lender within three months of your fixed rate expiring to find out if they’re offering an attractive rate or another incentive to stay.
While banks care about retaining your loan, they generally reserve the most competitive rates for new customers. If you think there might be a better deal out there, a broker can help you shop around and refinance to a new lender. Your circumstances may also have changed since you took out the loan, as a lot can happen in two years.
Review your budget
If you’re feeling some nerves about your future repayments, now could be a good time to assess your budget. If you’re usually inclined to ‘set and forget’, use this opportunity to look at your overall discretionary spending.
By minimising unnecessary expenses, including subscriptions and credit cards, and consolidating any debts, such as car or personal loans, you’re in a better place to withstand rate rises.
When in doubt, talk to a broker
Instead of relying on products offered by a single bank, a trusted broker can compare many different lenders and potentially thousands of loan products, so the end of your fixed term is a prime opportunity to reassess. You may also want to access equity to purchase an investment property or start a renovation project, which will inform your next rate.
It’s important to note that lenders will add a buffer to your home loan interest rate to ensure you’ll be able to withstand future rate hikes. A broker can help you determine what you can comfortably afford long-term. If you’re self-employed, you’ll need to show enough net earnings to service your debt on the new rate, and a broker can help you strategise here.
To find out how your repayments could change on a new rate, use the Broker One Loan Repayment Calculator located here.
The bottom line? Don’t sit by and wait for the ‘fixed rate cliff’, as a few small steps could make a huge difference.
Stay tuned for more tips and tricks to help you navigate the ever-changing economic environment and property market.
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Broker One Finance is a mortgage broker in Melbourne specialising in home loans, investment property loans and refinancing. Contact us today for an assessment call.
