Australians who nailed their mortgage rates to the floor during the pandemic are being urged to consider renegotiating their loans before a massive jump in their monthly bills next year.
Hundreds of thousands of home owners fixed their home loan rates during the pandemic, when market rates were hovering about 2 per cent in response to the pandemic-induced recession.
Those people have so far been spared the record-breaking rise in rates that has happened as the Reserve Bank moves to quell soaring inflation.
But soon they will roll over onto much more expensive revert rates that will likely be higher than 5 per cent, according to Canstar’s Steve Mickenbecker, who has been crunching the numbers.
“It’s just staggering. In terms of repayments it would lift you from about $3930 roughly to $5479 on a $1 million loan over 30 years,” he said.
“Not many household budgets can deal with that.”
Home owners with fixed rates are being urged to start preparing now, including by looking at their options for refinancing, which could help insulate households from the biggest cost rises.
Mortgage cliff looms
It’s difficult to understate how many Australians fixed their loans during the pandemic years.
The proportion of households with fixed-rate mortgages shot up from 20 per cent at the start of 2020 to nearly 40 per cent by 2022 – with most of those loans reverting over the next year.
And most of those people are now facing much higher reversion rates because the RBA has hiked its cash rate target so steeply over the past seven months, moving from 0.1 per cent to a nine-year high of 2.85 per cent since May.
Making matters worse, Mr Mickenbecker says revert rates are typically higher than the home loan rates banks advertise to new customers, meaning those who stay on their deal will pay more.
“It’s often the old standard variable home loan rate and banks don’t do new business at that rate at all, it’s too high and isn’t competitive,” he said.
“The average variable loan rate today is 5.18 per cent, while the average of the two-year fixed rate [in 2020] was 2.46 per cent.”
“That’s a doubling of the rate in one hit.”
Home owners urged to refinance
David Hancock, a financial planner and CEO of Montara Wealth, said home owners on fixed rates should consider their options for refinancing two or three months before their rate reverts.
“Different lenders have a different appetite for different borrowers, and the process itself can take a bit of time,” Mr Hancock said.
“You want to be picking it up a few months ahead of time.”
Mr Hancock said the good news is that many households have been socking record amounts of money away in their savings and mortgage offset accounts to prepare to pay these higher rates.
“The majority of people are aware rates are going up. They’re not stupid and they’re planning for it,” he said.
There’s a “big opportunity” for home owners reverting from fixed rates to refinance, Mr Hancock said, because banks are in tough competition to draw in new business as lending rates plunge.
And because refinancers are considered lower-risk borrowers than new buyers, lenders really want to draw existing home loans away from their competitors.
“Banks are competitive, so if there’s not as much business out there fundamentally they want to retain existing business and attract business off each other,” Mr Hancock said.
“Even if lenders don’t want to go to another fixed rate they can look at a variable rate with a cash back or something like that – the offers are pretty strong at the moment.”
