Around two thirds of all fixed rate mortgages taken out during the pandemic will mature before the end of 2023*, with the remaining one third maturing in 2024. Most of these fixed rate borrowers will be making the tough transition to floating rate loans that are 3 to 4 per cent higher – essentially nearly double - than what they’re currently on. It’s inevitable that some households in Australia will face significant financial stress. Here are some tips on how to navigate a fixed rate rollover.

Why the big rollover

During the pandemic, a higher than normal number of fixed rate loans were financed at really low interest rates, around the 1 to 2 per cent mark. While fixed rate loans typically only account for around 20 per cent of the Australian loan book, due to the sub 2 per cent rates on offer, and the $188-billion of three year loans indirectly financed by the Reserve Bank of Australia, as much as 40 per cent of loans written were on a fixed rate.

Furthermore, where banks were required by APRA to apply a 2.5 per cent mortgage repayment stress test when assessing new home loan applications, which increased to 3 per cent in October 2021, the RBA has already raised its cash rate by more than this. And, with a cash rate target of 3.75 percentage points, the RBA could effectively expose many of these borrowers to financial risk.

What to do

Economists are divided about when interest rates are likely to peak and begin decreasing, with some pegging mid-2023 as the peak, easing towards the end of the year. Others believe interest rates will remain high until the end of 2024. 

However interest rates play out, it’s important that borrowers are armed with the tools and knowledge they need to weather this financial storm. At Mortgage Express, we’re working with our clients to help them stay in control of their finances in the following ways:

• Reviewing current mortgage structures and interest rates with advice for refixing and refinancing. For borrowers switching to variable interest rates later this year, our team is helping them understand the impact that higher repayments will have on their budget, and providing solutions with a range of lender options.
• Reminding our clients to review “set and forget” expenses, such as energy, insurance and telco, and to shop around for deals that could save them money and provide them with a little more buffer in the budget.
• Helping clients set a budget and review spending, to get into the habit of managing finances. A big focus is on paying down existing debt – and cutting back on discretionary spending - to free up more cash for the home loan.
• Educating clients on how lenders stress-test mortgage repayments upon application, and providing an outline of expected repayments based on a range of interest rates.
• Ensuring clients are using strategies such as offset accounts or additional repayments while their fixed interest rate remains low, to offset the impact of a rise in interest rates when they roll over and help smooth out household budget variations.
• Helping clients understand the importance of buying property with good fundamentals – such as location, quality of build, aspect, and access to infrastructure – so that, over time, their investment appreciates and builds equity as value increases and they pay down their mortgage.
• Reminding clients that there are deals available, particularly for borrowers with an LVR higher than 60 per cent, where lenders are more likely to discount. A property valuation could help you take advantage of equity in your home to leverage a better deal.
• Planning for the future with a financial plan that takes into account your current and future financial needs.

For financial advice tailored to your situation, or assistance with any of the above services, contact Mortgage Express today to connect with a mortgage broker in your area. 

References:

* https://www.afr.com/markets/debt-markets/rba-interest-rate-pause-on-the-cards-20221227-p5c8wn

While all care has been taken in the preparation of this publication, no warranty is given as to the accuracy of the information and no responsibility is taken by Finservice Pty Ltd (Mortgage Express) for any errors or omissions. This publication does not constitute personalised financial advice. It may not be relevant to individual circumstances. Nothing in this publication is, or should be taken as, an offer, invitation, or recommendation to buy, sell, or retain any investment in or make any deposit with any person. You should seek professional advice before taking any action in relation to the matters dealt within this publication. A Disclosure Statement is available on request and free of charge.

Finservice Pty Ltd (Mortgage Express) is authorised as a corporate credit representative (Corporate Credit Representative Number 397386) to engage in credit activities on behalf of BLSSA Pty Ltd (Australian Credit Licence number 391237) ACN 123 600 000 | Full member of MFAA | Member of Australian Financial Complaints Authority (AFCA) | Member of Choice Aggregation Services.