Is your fixed home loan coming to an end? You may be wondering what happens next or what to do.
If you fixed your home loan in 2020 or 2021 when rates were at a record low in Australia (which many people did), you may experience mortgage stress if your fixed term ends when interest rates are significantly higher. This is because you will likely be moving from a low interest rate to a higher rate, and therefore higher repayments.
To help with what may be a stressful and confusing time, we explain how interest rate rises may affect you, as well as the difference between fixed and variable home loans and how they may work for you.
Why do interest rates rise?
Recently, Australians have experienced relatively low interest rates for a number of years.
Interest rates are influenced by the official cash rate, which is controlled by the Reserve Bank of Australia (RBA). During the Covid pandemic, the RBA lowered the cash rate to stimulate the economy and encourage spending. Low home loan rates generally mean that people have lower repayments, and therefore more money in their pocket to spend. During this time, people also took out large home loans due to high house prices. These home loans are more affordable when interest rates are low.
In May 2022, the RBA began to lift the cash rate for the first time in 11 years, for the opposite reason – to curb spending and lower inflation. Since then, there have been nine increases to the cash rate, resulting in the steady increase in home loan interest rates. Higher interest rates mean higher repayments, making home loans more unaffordable and resulting in people having less money to spend. It also makes it more difficult for borrowers to access loans.
The cash rate is one of the most significant influencers on home loan interest rates.
What happens when my fixed term ends?
If you’ve been on a low fixed rate during the recent interest rate rises, you wouldn’t have experienced an increase to your repayments. However, if your fixed term is about to end, your new home loan is likely to have a significantly higher interest rate, meaning your repayments could take a significant jump. This may be a bit of a shock to the system and cause mortgage stress.
Our home loan calculator can help you work out what your repayments might be. It may be a good idea to start thinking about your budgets and spending in the lead up to your fixed term ending. Our budget tracker is a tool that can help with this.
When your fixed term ends, your lender might roll you onto a variable rate. You might want to choose to re-fix your home loan instead, or refinance to a different lender if you are eligible. Before making any decisions, you will need to consider your personal circumstances.
Should I fix my interest rate?
A fixed interest rate will remain the same for a period of time. This time depends on how long you choose to fix the loan for (at People’s Choice you can choose between 1-5 years), and the rate will vary depending on the number of years you choose.
Having a fixed rate means your repayments won’t change during that period. This can be helpful for budgeting and peace of mind, which could be appealing with the increasing cost of living. If interest rates increase then you’ll be fortunate enough to keep your current rate within the fixed period, but if interest rates fall you won't be able to take advantage of the reduced rate.
Currently, fixed rates are generally higher than variable rates, as you are paying more for the security during this time of uncertainty.
It is a good idea to use a repayment calculator to see if you can make fixed rate repayments comfortably.
Features of fixed home loans
Fixed rate home loans typically have fewer features. For example, you’re usually limited in the amount of extra repayments you can make and may not be able to redraw during the fixed loan period. In some cases, you may have to pay 'break costs' if you prepay amounts on the loan.
Should I choose a variable rate home loan?
Variable interest rates move in line with the market which means your repayment amounts may change over time. Rates may rise or fall, which will cause a change to your repayment amount. The change may or may not be to your advantage – this is the risk you take by choosing a variable interest rate.
Features of variable loans
A variable rate home loan tends to allow for extra additional repayments so you can pay off your loan sooner. Many variable rate home loans also offer an offset account so you can use your savings to reduce the amount of interest you pay. This could be beneficial if you can afford to pay extra repayments in a rising rate market.
At People’s Choice, we offer a range of variable home loans. You can compare them using our comparison tool.
There is a third option, which is where you can choose a fixed interest rate for part of your loan amount and a variable interest rate for the rest. This is known as a split loan. The fixed portion helps to protect you from rate rises while the variable portion allows you to pay extra amounts off your loan sooner, and benefit from any falls in interest rates.
A split loan can be a way for you to access additional features offered by variable loans, while locking in some certainty with a fixed rate. For example, at People’s Choice with a split loan you have access to an offset account – which you wouldn’t be able to get with a solely fixed loan.
For more information on split loans, visit our dedicated page.
If your low fixed rate term is coming to an end, it’s understandable to be unsure about what to do next. If you need some help, our friendly Home Loan Advisers would be more than happy to talk you through your options. Find one near you today.
The content of this article is up-to-date and accurate at the time of publication (2 March 2023).