Fixed term ending soon? You could be paying $7,800 more a year

In the last two years, Australia’s property market has been shocked by a few seismic shifts. Not only did the pandemic bring an explosion of property prices, but until recently, fixed rate home loans were at deeply attractive lows. 

Aussies pounced on the opportunity when they had it, expanding the share of fixed mortgages from 20% at the start of 2020 to nearly 40% earlier this year. But as inflation dogs the economy and interest rates rise, many borrowers will find themselves rolling off their fixed terms into a dramatically different rate environment from the one they bought into.

In a speech on Tuesday, RBA deputy governor Michele Bullock warned that while most borrowers with variable interest rate mortgages were poised to handle higher interest, those who fixed two years ago might be hung out to dry.

Assuming every fixed rate rolls onto a variable rate at current market pricing, Bullock explains, “estimates suggest that around half of fixed-rate loans [...] would face an increase in repayments of at least 40%.” 

According to Bullock’s statement, this equates to a median increase of around $650 extra in monthly repayments – or $7,800 more a year.

“This is slightly more than the rise in payments that variable-rate borrowers would experience over this time,” she added for context. “[And] unlike borrowers who hold variable-rate loans, we have very little visibility of how much saving those with fixed-rate loans have been doing in recent years.”

Features like offset accounts or free extra repayments are more common with variable rate home loans, meaning those with fixed mortgages may face restrictions on how much of their savings (if any) they can redirect into future payments. Borrowers who didn’t use their locked-in rates to put aside more savings could find their wallets crushed on impact once their fixed terms end.

Unfortunately, mortgage holders hoping to avoid rate hikes by refinancing to another cheap fixed home loan are mostly out of luck. 

“Fixed rates are basically out of the market now,” says Mozo’s banking expert Peter Marshall. And no wonder: on average, fixed rates tracked in Mozo’s database have doubled on most terms since July 2021. In the last few months alone, many big four offers on 4-year terms have nearly tripled.

“The big banks are certainly not trying to attract customers with their fixed rates,” Marshall continued, “so they’re looking at what else they can do to get people in the door.”

Variable rates have seen the hottest competition as a result, despite the flood of recent rises. For borrowers hoping to refinance, comparing deals has become more crucial than ever. But those coming off fixed terms may also find they have reduced borrowing power in a high interest rate landscape. 

“The banks will do a serviceability assessment and quite realistically ask, ‘What if rates go up to 7%? How much can you afford to borrow?’” Marshall explains. “And that’s going to reduce people’s buying power by quite a bit.”

Unless house prices see some meaningful falls, one could easily feel the odds have been stacked against them.

Westpac warns we haven’t seen the last of all the rate rises, with the official cash rate projected to peak at 2.6% in February 2023 – 2.5% higher than it was just in April. However, in her concluding remarks, Michele Bullock tempered her more dire observations with some helpful grains of salt. 

“At the moment [...] unemployment is at its lowest level in nearly 50 years,” Bullock explains. “Having a job is the best way of ensuring that you can continue to meet repayments on your loan.”

So while wage growth may have stagnated, full employment is still a promising sign borrowers may yet weather the storm (without dropping us into a recession).

“How much the [Reserve Bank] Board decides to raise rates will depend on developments in the economy, including how borrowers respond to higher rates,” says Bullock. “This, along with the Board's assessment of the outlook for inflation, will be important considerations in deciding the size and timing of future interest rate increases.”

In the meantime, there are a few helpful workarounds borrowers can employ to keep things smooth sailing, including taking full advantage of their offset account – or if they don’t have one, switching to a home loan that does.

On the hunt for a home loan? Here are some top-notch refinance home loan offers to check out.