Borrowers who have locked in record fixed interest rates below 2% for the past few years are likely to face a substantial increase in mortgage repayments when their fixed terms end and they switch to their lender’s standard variable rate. .
The major banks now expect the official interest rate to rise by 1-2 percentage points over the next two years, which could push typical variable rates to between 4 and 5%.
While many borrowers with fixed-rate loans still have time to enjoy low, steady repayments, preparing for rising rates now could put them in a better position when their fixed terms come to an end.
How are fixed rate mortgage holders affected by rising interest rates?
Holders of fixed-rate mortgages may be protected from initial increases in the cash rate, but they will not remain indifferent forever, said ANZ chief economist Felicity Emmett.
“In 2020, we could get rates below 2% on a three-year or two-year mortgage,” she said. “Over the next couple of years, we’re going to see a number of people move out of these fixed mortgage rates at term expiration and into variable mortgage rates, and those rates will be significantly higher.”
Due to the extraordinary measures taken by the RBA during the pandemic to help lower borrowing costs, an unusually high share of borrowers now have fixed-rate mortgages, Emmett said.
“If we look back in 2019, it was around 15% of people taking these [fixed] rate,” she said. “But, through 2020 and into 2021, we’ve seen that pick up a bit, with a peak of around 46% of people taking fixed rate loans in the middle of 2021.”
As a result, many homeowners could see a significant increase in their repayments over the months and years to come.
“It’s actually going to be a very common problem for borrowers,” Emmet said. “[That is,] have this pretty big increase in refunds over the next two years.
For a borrower with a $500,000 home loan that is fixed at 2%, a sudden increase in their interest rate of 2-3 percentage points at the end of their fixed rate could mean that their repayments would increase by $539. at $836 per month, as calculated using the Estate’s Home Loan Repayment Calculator.
While some homeowners have experience servicing their mortgages at much higher interest rates than they do today, many new borrowers have only seen their repayments drop due to the stimulus. extraordinary actions of the RBA during the pandemic.
“Interest rates have been very low for a long time and we know it [increase] will be a new experience for some customers,” said Andy Kerr, Director of Home Ownership at NAB.
What can fixed rate mortgage holders do to prepare for rising interest rates?
While the prospect of rising mortgage payments can be daunting, there are ways for fixed rate mortgage holders to prepare before the end of their term.
Review your home loan
Whether your fixed rate expires in six months or six days, it’s worth having a conversation with your broker to review your current rate and loan structure, said Lianna Mills, senior home loan specialist at Estate real estate loans.
“At any time, your loan can be reconsidered,” she said. “With all the current uncertainty, it’s important to understand what your options are.”
Reviewing your home loan now could help you determine if you can refinance at a lower interest rate, or reset your rate for certainty of future repayments.
Get ahead of your home loan
If you can, making extra payments on your mortgage now could help lessen the impact of increased repayments in the future.
While fixed-rate borrowers are likely to have a cap on how much extra they can spend on their mortgage payments, it’s worth checking out what that cap is and considering making additional repayments now, in the future. whenever possible, Mills said.
“Making extra payments on your fixed home loan, making sure you’re within your extra repayment cap, provides a buffer in case rates rise,” she said.
“This may provide some comfort, as your additional repayments will likely cause your home loan to be paid off early.”
For borrowers who prefer the security of their current fixed mortgage, refix or refinancing before the end of their fixed term can be beneficial, Mills said.
“Initially you might see an increase in refunds, but the view is that you’ll be in a safer and more stable position on the track.”
How high will interest rates go?
While the four major Australian banks rising mortgage rates in line with the RBA’s 25 basis point increase, there is little consensus on exactly where and when the cash rate will peak.
Both NAB and ANZ predicted the spot rate would peak at around 2.5%. ANZ expects this to happen in the middle of next year, while NAB expects the peak to be reached towards the end of 2024.
Westpac predicted a slightly lower peak of 2.25% by the middle of next year, while the CBA expects the cash rate to hit 1.6% in early 2023, the expectation the lowest of the four big banks.
Big Four Bank Cash Rate Target Forecasts
|Bank||How high will the cash rate go?||When will the cash rate peak?|
|NAB||2.50%||End of 2024|
Information correct at time of publication. Mortgage rates are usually a few percentage points higher than the cash rate.
The Reserve Bank is expected to be highly informed about the reaction of the economy to its monetary policy.
“I think they’re going to sit and watch to see what impact these moves actually have. [had] on the economy,” said Alan Oster, chief economist at NAB.
“If the economy stays really strong, they might go a bit further.”
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