The pandemic saw a torrent of ultra-low fixed interest rates set up for Australian homeowners and investors alike. However, many of these fixed loans are set to expire, and borrowers will face a sharp increase in their interest rates, which has been dubbed somewhat ominously by the Australian media as the “mortgage cliff.”
The expiry of these fixed rates over the coming months and years could cause significant financial stress for borrowers who are unprepared for the sudden increase in their mortgage payments. In some cases, monthly mortgage payments could double, putting a significant strain on an already elevated household budget.
Thankfully, there are some sound options available for those with fixed rates to mitigate the impact of the so-called cliff!
- One of the most effective solutions is to pick up the phone and call your current lender to needle them to improve your rate. It is a well-known fact in the banking industry that it is cheaper to keep a current borrower than to seek out a new one so you might be surprised by what they may be able to offer you. Once you have done this you can compare the market yourself or use the services of a mortgage broker to assist you in comparing like-for-like options.
- Failing a decent response from your current bank or lender, you can seek to refinance your home loan. This is best done by a professional mortgage broker, who will be experienced in comparing like-for-like products, policies and structures. Since interest rates started to rise in 2022 lenders have slowly increased the assessment criteria that may result in you being unable to refinance your current loan based on the revised stress-tested rates even though you are making repayments at a higher rate today! Further compounding this complexity is the fact that borrowers with higher LVR’s (Loan to Valuation Ratios) may have experienced a reduction in the value of their property which can make refinancing uneconomical. An experienced broker will help you clearly navigate the benefits and costs early on before you commit to any decision.
- Switch your loan to interest only and/or extend the term. This really should be a last resort option because while your monthly repayments may drop considerably, the true long-term cost can add tens of thousands of dollars to the total cost over the life of your mortgage. Extreme caution needs to be applied when looking at this option and getting a professional broker in your corner to model out the effects is highly advisable.
By working with an experienced mortgage broker, like the team at AXTON Finance, we can help you understand the terms of your current loan, including any hidden fees or penalties that could impact the refinancing process. Will will have a high degree of confidence that your decision will be an informed one that one helps you avoid any costly mistakes.
The mortgage cliff is a looming challenge for borrowers with expiring ultra-cheap fixed home and investment loans. However, there are some simple solutions available, such as refinancing, that can help mitigate the impact of rising interest rates.