Fixed home loan expiring soon? Here’s what you should consider

Fixed rate mortgage cliff
Photo:Getty

The Reserve Bank’s continuing push with interest rate hikes has brought into focus the dilemma that borrowers now face in choosing their home loans.

Should homeowners opt for a variable rate home loan at a time when interest rates could go up further and other cost of living pressures are already putting intense pressure on household budgets? Or should they lock in fixed rate loans that provide stability but risk repayments swelling at a later date?

The issue has assumed significance at a time when a so-called ‘fixed-rate cliff’ has emerged as a key risk in the housing market and could lead to ever larger volumes of refinancing.

Impact of interest rate hikes

The RBA hiked its cash rate for the 10th straight time in March and has now delivered a whopping increase of 350 basis points since April 2022. The benchmark rate currently sits at 3.60% – its highest level in nearly 11 years.

It has already had a huge financial impact on home loan borrowers. According to analysis by Mozo, variable rates on an average $600,000 mortgage jumped from 2.6% in May 2022 to 6.1% in March 2023, translating into a nearly $1,200 increase in monthly repayments over that period.

But the situation is even more stressful for borrowers who locked in fixed term loans during 2020 or 2021, when cheap funding under the RBA’s pandemic measures prompted banks to drop fixed rate loans to as low as 1.95%.

According to data from Corelogic, two-thirds of these fixed home loans will expire in 2023. These borrowings will then roll over to variable rates that could be as high as 7%, suddenly adding hundreds of dollars to monthly repayments.

The issue has already driven strong interest in refinancing as homeowners shop around in search of a better deal or consider locking into new fixed rate contracts.

Data from the Australian Bureau of Statistics shows the value of home loan refinancing has remained near record highs since November, with $18.6 billion refinanced in January, even as new home loans have slumped 35% over a 12 month period.

Are fixed rate home loans still attractive?

Fixed loans are currently available at a relatively high rate of around 6.1%, but the biggest reason borrowers look for this type of home loan is the certainty it provides. 

With a fixed interest rate, households are able to budget their finances more effectively as monthly repayments remain the same. This makes it easier to plan and manage expenses, especially at a time when everyday costs ranging from groceries to fuel to utility bills have surged.

A Mozo survey of over 1,000 homeowners across Australia found in February that 28% were on a fixed rate mortgage, while another 17% had a combination of variable and fixed rates on their loan.

More than a third of this cohort had chosen this option because they wanted predictable payments, while a similar number wanted to hedge against rising interest rates. A similar number were willing to lock in fixed rates again for the same reasons.

By comparison, of the remaining homeowners on variable rates, nearly two-thirds regretted not fixing their mortgage.

Fixed home loans offer protection from sudden increases in interest rates similar to the sharp lift witnessed in the current rate hike cycle. Repayments will remain the same even when market rates go up, allowing peace of mind and financial stability. This can be especially beneficial for first-time homebuyers who are still adjusting to their new financial responsibilities.

Higher risk of fixing

While fixed rates may seem attractive in the backdrop of a rising interest rate cycle, they come with some inherent disadvantages. 

These mortgages are not as flexible as variable rate loans because they typically limit additional repayments and also don’t offer access to redraw or offset accounts that effectively reduce interest costs. The borrower also doesn’t benefit from any future interest rate declines.

But their biggest drawback in the present context comes from the impact on homeowners when the fixed rate term expires and reverts to significantly higher variable rates. This is relevant because fixed loan terms generally range from 1-3 years in Australia, unlike other developed markets such as the United States where their duration extends for 15-30 years.

According to the Mozo survey, nearly three-quarters of the homeowners on fixed loans admitted to being stressed about being able to afford their mortgage when their fixed rates expire. 

The Reserve Bank this week highlighted the higher risk for borrowers who roll over from fixed loans to much higher interest rates. 

It said roughly one-in-four of these borrowers are spending more than 30% of their income on new loan payments after rolling off fixed rate loans, compared to between 5% and 25% of income previously.

The impact could get more severe as rates rise further. The RBA estimates about 90 per cent of loans that reset in 2023 and 2024 will lead to payments increasing 30% or more.

The solution could lie in negotiating a better rate with existing lenders before fixed loans automatically roll over to a standard variable rate, or scouting around the market for a better deal with other lenders.

Our experts comb through the best home loans on the market to help you compare and choose. Be sure to visit Mozo’s home loan comparison hub if you’re on the hunt for a top notch home loan.

This story was contributed to Mozo by financial journalist, Prashant Mehra. 

Compare low interest home loans - last updated 16 April 2024

Search promoted home loans below or do a full Mozo database search. Advertiser disclosure
  • Offset Home Loan

    Package, Owner Occupier, LVR<60%, Principal & Interest

    interest rate
    comparison rate
    Initial monthly repayment
    6.15% p.a. variable
    6.40% p.a.

    Ability to open up to 10 offset accounts per loan account. Fast online application. Linked Debit Mastercard® with fee-free access at ATMs across Australia. Package a credit card with your home loan and the annual card fee will be waived (T&Cs apply). 40% deposit required.

    Compare
    Details
  • Mozo Expert Choice Badge
    Express Home Loan

    Owner Occupier, Principal & Interest, LVR <90%

    interest rate
    comparison rate
    Initial monthly repayment
    6.01% p.a. variable
    6.14% p.a.

    Get fast online approval from the award-winning Bendigo Bank Express Home Loan. Multiple offset accounts and redraw available. 100% offset on variable rate loans and partial offset on fixed rate. Flexible repayment options. New home loans only.

    Compare
    Details
  • Neat Home Loan

    Owner Occupier, Principal & Interest, LVR <60%

    interest rate
    comparison rate
    Initial monthly repayment
    6.14% p.a. variable
    6.16% p.a.

    Competitively-priced variable rate loan. Ideal for owner occupiers and investors. No service fees to pay. Make free extra repayments and redraws. Flexible repayment schedule available.

    Compare
    Details
  • Basic Home Loan

    Fixed, Owner Occupier, Principal & Interest, LVR<70%

    interest rate
    comparison rate
    Initial monthly repayment
    5.99% p.a.
    fixed 3 years
    6.13% p.a.

    No upfront or ongoing fees. Free extra repayments and redraw facility. Option to earn Qantas points. Min 30% deposit required. Borrow up to $750,000.

    Compare
    Details

* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

^See information about the Mozo Experts Choice Home Loan Awards

Mozo provides general product information. We don't consider your personal objectives, financial situation or needs and we aren't recommending any specific product to you. You should make your own decision after reading the PDS or offer documentation, or seeking independent advice.

While we pride ourselves on covering a wide range of products, we don't cover every product in the market. If you decide to apply for a product through our website, you will be dealing directly with the provider of that product and not with Mozo.