There have been a lot of changes in the economy, with home loans quickly becoming more expensive after two years of low interest rates.

Interest rates are due to continue to increase in 2023, with two thirds of all fixed rate loans that were taken out expected to expire during 2023, according to a recent Reserve Bank of Australia’s (RBA) Financial Stability Review. This means that these borrowers are likely to experience a significant increase in their home loan repayments.

How much will borrowers pay when their fixed rate expires in 2023? 

Borrowers with a fixed rate mortgage expiring in 2023 will see their interest increase by around 3-4 percentage points.  The reason for such a rapid increase in interest rates is due to high inflation and the RBA’s response to the inflation figures. By increasing the cash rate (and, in turn, interest rates), the RBA hopes to reduce the risk of long-term high inflation which can lead to unemployment.

Regardless, the rate rises in 2022, marks the steepest increase in the cost of debt since the 1990s, when the RBA first started setting the cash rate.

Even though these interest rate increases are likely to benefit Australia’s economy in the long run, it can be challenging for mortgage borrowers – especially those with a soon-expiring fixed rate loan who will be in for a dramatic increase in their home loan repayments.

How will higher interest rates affect borrowers? 

Those with variable rate home loans are likely already used to the continuously increasing cash rate, but it’s fixed rate borrowers who could be in for a shock once their rate expires.

We strongly suggest contacting your broker or your bank prior to the end of your fixed rate, to negotiate a lower revert rate.  If you don’t, typically a fixed rate loan will revert to your lender’s standard variable rate or even a slightly higher variable rate.

However be prepared, even if you switch to a better rate, you’re still probably going to be paying more for your home loan repayments than you used to.

Borrowers who are unprepared for higher interest rates are more at risk to enter mortgage stress, falling behind on repayments or even mortgage default.  Mortgage stress if not handled well, can have flow on impacts to your personal life, and your physical and mental health.

If this is already you and you’re experiencing mortgage stress or you are at risk of falling behind on your repayments, get in touch with your lender’s hardship team.

How can refinancing help? 

Being prepared for your fixed rate’s expiration date is important, so it may be worthwhile to come up with a plan.

Refinancing and restructuring debt can help fixed rate borrowers have more control over their expiring home loan rate.  It also is a great opportunity to look elsewhere for more competitive deals. In fact, it’s becoming more popular to switch lenders, according to ABS data that indicates that $17.8 billion in home loans were refinanced in October 2022.

It may be better to wait until your fixed rate has expired before refinancing, as you could be charged break costs for refinancing before your fixed term is over.

It’s also important to remember that your home loan is more than just an interest rate. Consider what you need in a home loan (e.g. loan features, low fees, specific repayment structures) and don’t solely focus on the interest rate.

If you’re interested in refinancing, it’s a good idea to your broker or your bank. They’ll get to know you and your mortgage needs so that they can tell you more about your home loan options.

How to manage higher interest rates 

Here are some tips for dealing with higher interest rates and increased repayments:

1. Prepare for the end of your fixed rate:know when your fixed rate is expiring and speak to Connecting Finance.
2. Review your budget and current spending:if your repayments are increasing, it’s time to assess your budget and see what you can change to improve your financial situation. Maybe you need to cut out certain ‘unnecessary’ expenses – even if temporarily.  Connecting Finance will be running budget bootcamp sessions early 2023….keep an eye out for them!
3. Seek help when needed:if you’re struggling with your repayments, speak to your lender’s hardship team before the situation worsens. You can also speak to a financial councillor for free

Interested in refinancing? Whether you want a new lender or just a better interest rate, Connecting Finance will be able to assist a wide range of borrowers. Get in touch to book your free appointment today!

Geoff Bell, Director, Connecting Finance