What does a fixed interest rate rise mean for you?
Interest rates in Australia hit a seven year high last month, after the RBA increased the cash rate for the fifth month running. Home owners who are currently in a fixed rate loan may feel a sense of relief. After all, their interest rates are already set. But rising interest rates will still have an impact on fixed rate home loans.
Here’s how.
How rising interest rates are impacting fixed rate home loans
How does a fixed rate home loan work?
When you have a fixed rate home loan your interest rate is fixed at a certain percentage rate. Generally this is in line with the lender’s base interest rate as set in relation to the RBA’s cash rate. In most cases the fixed rate term of the loan will expire after two or three years. Once it expires, the loan will automatically revert to a variable rate (known as the revert rate). These types of home loans are more accurately referred to as ‘hybrid loans’ because they have elements of both fixed and variable interest in them.
Why do borrowers choose fixed rate home loans?
A fixed rate home loan is very attractive to borrowers who want to have stability in their repayments over the term of their loan. While there may be times that the loan payment is more than market value, borrowers feel that it lowers their risk or exposure to market volatility.
What happens when there's a fixed interest rate rise?
If you’ve already locked in a low fixed interest rate on your home loan, that’s fantastic news. It means you won’t be subject to any increase of your lender’s standard variable interest rate. In other words, you won’t have any fixed interest rate rises at all.
However, this is only true for as long as you remain in your fixed period.
With the cash rate rising, the majority of lenders will also increase their own interest rates steadily in line with the Reserve Bank. While you’re in the fixed rate period you are ‘insulated’ from the impacts of cash rate increases. But sadly this can’t last forever.
After the fixed term ends
If you have a fixed interest home loan, you have most likely heard of a revert rate. It is the variable rate interest rate you will automatically switch (‘revert’) to at the end of your fixed rate period.
Revert rates tend to be higher than your lender’s standard variable rate. And it is likely already set within your loan documents. The reason revert rates tend to be higher than standard variable rates is that this helps lenders to recoup the difference in fixed and variable interest rates during the fixed period of your loan.
Regardless of the reason, many home owners find themselves shocked by the rapid increase in repayments they face once the fixed term ends. The Deputy Governor of the RBA, Michele Bullock, recently said that around half of current fixed-rate loans ‘would face an increase in repayments of at least 40 percent’, once the fixed-term expires. This assumes that ‘all fixed-rate loans roll onto variable mortgage rates and new variable rates are broadly informed by current market pricing’.
Your options when your fixed-term ends
To avoid switching to a higher revert rate, you could negotiate another fixed rate term or another variable rate with a new lender. Or you could refinance with your current lender to get a better interest rate or perhaps even an introductory rate.
However, your first step is to make sure you are aware of when your fixed-rate term is due to end, so you can be across the options available to you. But what are these options?
Your options
Do nothing and automatically switch to your lender’s revert rate. Make sure you contact your lender, so you know what the revert rate will be.
Seek to fix your interest rate again. It is very likely that the fixed interest rate will have risen significantly since your first fixed your loan rate. This will mean higher loan repayments. But it will also mean stability in knowing what your repayments will be during the (next) fixed period.
Negotiate a new loan package with your existing lender. This could be beneficial to you if your lender’s variable rate is lower than the revert rate. Make sure you know of any fees associated with changing loan packages with your existing lender. This is something we can help you with.
Worried you’re going to be subject to a fixed interest rate rise?
With interest rates on the rise, fixed interest rates will rise as well. You may not be subject to those rises while you’re in your fixed term. But they will impact you eventually.
Some homeowners may have experience in meeting mortgage repayments at higher rates. But many people became first time borrowers during the pandemic, when interest rates were very low. If this is you, you might feel worried as your fixed rate term comes closer to expiring. But don’t panic. Find out when your revert rate will come into effect (and what it will be) and then put in a strategy to manage it. You’ll get the best deal and be able to meet your higher interest rate payments.
Is a fixed rate home loan right for you? At Lending Loop, we are here to help you navigate every step of the borrowing process – including refinancing when fixed interest rates rise. We try and cut through the confusion and give you the info you need to find the right loan (and interest rate!) for you. Get in touch today with all your interest rate, refinance, and mortgage questions. We’d be happy to help.
