Australian homeowners who have opted for variable interest rate home loans are at risk of budget fluctuations due to the changing market conditions. This is because not only could their monthly, weekly or fortnightly repayments increase or decrease but so too will the amount of interest charged by lenders. Therefore Australian households must be prepared for any changes to their spending when it comes to repaying a loan with an adjustable rate of interest, especially when the fixed rate ends.
What is a fixed rate mortgage (FRM)?
A fixed-rate mortgage (FRM) is a type of home loan where the interest rate remains constant throughout the entire term of the loan. This means that the borrower’s monthly repayments stay the same for the duration of the fixed period, which typically ranges from one to five years in Australia.
By opting for a fixed mortgage rate, Australians can assure that their repayments remain consistent over the agreed period. This simplifies budgeting while providing protection against any fluctuations in variable interest rates during this time. However, be aware that exiting early before the term ends may incur exorbitant break fees; so think carefully if you’re considering refinancing with another lender. Therefore it’s important to understand the difference between fixed and variable rate loans.
What this has to do with interest rates
For borrowers who opted for a fixed-rate home loan prior to the Reserve Bank of Australia’s recent announcements, this could be a saving grace. Their interest rate and thus their mortgage repayments should stay consistent throughout the entirety of their fixed rate period – meaning far less financial stress.
What about when the fixed rate period ends?
When a fixed rate period ends on a mortgage in Australia, your loan will typically switch to a variable interest rate unless you take action. This variable rate, often referred to as the revert rate, is usually higher than the fixed rate you were paying. It’s important to be aware of this change to avoid any unexpected increases in your mortgage payments.
Lender contact
Before the fixed term expires, your lender will usually contact you, typically around 6-8 weeks in advance, to inform you of your options and provide details about the new repayment terms. This notification gives you time to consider your next steps and make an informed decision about how to proceed.
What are your options?
You generally have three main options when your fixed rate period ends. Firstly, you can re-fix your loan by locking in a new fixed rate for another term, which can range from 1 to 5 years. This option is beneficial if you prefer the predictability of fixed repayments.
Secondly, you can allow your loan to roll over to the variable rate, which might offer more flexibility in terms of making extra repayments or accessing features like offset accounts.
Lastly, you can choose to split your loan, dividing it into both fixed and variable components, which allows you to balance predictability with flexibility.
Nevertheless, when the introductory period ends, your mortgage may switch back to its standard variable interest rate. This is typically higher than most lenders’ discounted variable rates that are advertised as incentives for new customers. As well as this, given the current cash rate increase, this could be even more expensive than anticipated – meaning you’re in danger of suffering from bill shock and financial hardship if you don’t take proper precautions!
