Fixed-Term Loan is Ending

What to Do When Your Fixed-Term Loan is Ending? For many Aussies, the last of the 'low rate fixed term loans' from 2019/20 will be ending in late 2022 and the first half of 2023. So what can be done when your Fixed-Term Loan is Ending?

Australia has seen a prolonged period of record-low interest rates, and over the past two years, many astute homeowners have secured fixed-rate loans. However, once you see those fixed-terms loans ending, you need to carefully evaluate what to do next, to avoid a massive bill shock with the interest rates that have risen in 2022.

By the end of June, mortgages issued by the Commonwealth Bank only have reached the end of their fixed terms. These loans alone represent a loan volume of $19 billion.

By the end of 2022, another $25 billion will be nearing the end of a fixed term. Additionally, CommBank customers would jointly have mortgages ending their fixed terms worth close to $100 billion in 2023.

However, these homeowners will be facing new problems. The changing interest rate environment is a burden for these homeowners.

When the Reserve Bank raised interest rates by 0.25% in May, it put an end to its historically low cash rate. This choice, together with the statement that "normalising monetary conditions" has begun, raises the possibility that rate increases will continue soon.

How All These Will Impact Your Repayments

When a fixed term expires, homeowners who have benefited from its steadiness must make important financial decisions. Rate increases can hurt anyone's budget. The rate locked in and the timing of the lock-in determine how much of a rate shift the homeowner will feel.

For example, in the middle of 2020, borrowers who locked in for two years would probably be paying an average rate of 2.27%. This entails $1,916 in payments every month for a loan of $500,000. If the average variable rate at the end of the fixed term is approximately 2.89%, then switching to a variable rate will probably increase monthly repayments by $153 to $2,069.

The situation might be more difficult for individuals who signed a three-year fixed-term contract at the beginning of 2020. The typical interest rate for these homes is 2.98%. The estimated monthly repayment amount for a loan of $500,000 is $2,103. When the fixed period finishes, the same borrower may have to pay an additional $231 more in monthly repayments if variable rates increase to 3.89% by the beginning of 2023.

It will be different for those who started their fixed term in 2019, before the pandemic. The average three-year fixed rate was 3.77%, whereas the Reserve Bank's cash rate was significantly higher at 1.0%. Even though these homeowners have been paying a higher rate for a while, they may save up to $223 per month on their loan payments when their fixed rate ends. By mid-2022, a typical variable rate of 2.89% is assumed.

What You Need to Do When Your Fixed-Term Loan is Ending

All these options serve as a reminder that no single solution applies to all homeowners approaching the conclusion of a fixed term. Still, there are four main choices, and it's essential to understand the advantages and disadvantages of each.

• Keep your current loan's variable interest rate.

This option involves doing nothing. The borrower stays with the current lender as the loan is switched to a standard variable rate.

Advantages: 

The simplicity of this tactic is what makes it appealing. Simply rolling over to a regular variable rate can satisfy one’s desire for straightforwardness. In addition, it saves time and is effort-free.

Disadvantages: 

The current variable rate on offer might not be as alluring as the lower fixed rates the lender provided during lock-in. Therefore, it is imperative to at least call the lender in advance. This provides the chance to compare rates on the market and see whether refinancing could be a better option.

Who is this option for?

If the loan rate is competitive, then this is a good idea. If the lender has a package loan that offers valuable benefits and savings on other financial products, then this option is also worth considering.

• Apply for another fixed term.

Borrowers will not have to be concerned about market rate increases if they lock in for a few more years. 

Advantages: 

In the current rising interest rate environment, it may make sense to fix the loan rate. In recent months, fixed rates have risen a little. However, competitive deals are still available, provided the borrower is willing to explore beyond the big banks.

Disadvantages:

Check whether locking in prevents the borrower from accessing any advantageous features. Home loans with fixed rates are getting more accommodating. Some now provide options including fee-free additional repayments, redraw, and even linked offset accounts. Make sure to examine all aspects of the loan, not just its rates.

Who is this option for?

Returning to a fixed rate protects the borrower from rising variable rates, but only for a fixed period. Household finances may need to be rebalanced at some time to deal with the new reality of rising interest rates. 

• Divide your loan into fixed and variable payments.

Many lenders permit the distribution of house loans between fixed and variable rates, frequently in the ratios the borrowers specify. 

Advantages: 

Borrowers enjoy the benefits of both types of loans with a split loan. The fixed-rate part protects the borrower from rising rates, while the variable component gives the borrower flexibility.

Disadvantages:

The borrower also needs to deal with the downsides of both types of loans. The main disadvantage of splitting is that the borrower will not receive the entire savings on the fixed portion of the loan.

Who is this option for?

It is a handy option for those who cannot decide between fixed and variable-rate loans. 

• Refinance the mortgage.

Homeowners should typically reassess their loans if interest rates move in a new direction. Additionally, if the borrower is leaving a fixed rate with possibly the same mortgage for several years, it could be time to compare the loan to those in the market as a whole.

Advantages: 

Refinancing may present a chance to get a better rate.

Disadvantages:

The homeowner’s ability to borrow money could be affected if his situation has changed since the lock-in of the present loan.

On the other hand, the borrower might be making more money now than at the start of the fixed-rate loan. Speaking with a lender or mortgage broker is the only sure-fire way to determine how much one can borrow.

Who is this option for?

If the borrower has a large amount of home equity, few other debts, and enough income to meet the serviceability standards of low-rate lenders, refinancing may be the best option.

Here at Makes Cents, we are committed to helping you make sound financial decisions. One of those sound decisions would be to speak to a licensed mortgage broker who can compare 35+ lenders and find you the best solution for when your Fixed-Term Loan is Ending. Speak to a mortgage broker today >