How rising interest rates could affect fixed-rate mortgage holders
Borrowers who have secured record-low fixed interest rates below 2 percent in recent years are likely to face a significant increase in mortgage repayments as their fixed terms end and they switch to their lender’s standard variable rate.
Big banks are now forecasting a 1 to 2 percentage point hike in the official interest rate over the next two years, which could push typical floating rates down to 4 to 5 percent.
While many borrowers with fixed-rate loans still have time to enjoy low and steady repayments, they could now be preparing for rising interest rates as their fixed-rate loans end.
How are fixed-rate mortgage holders affected by rising interest rates?
Fixed-rate mortgage holders may be insulated from initial increases in cash rates, but they won’t be unaffected forever, said ANZ senior economist Felicity Emmett.
“In 2020, we could get interest on a three-year or two-year mortgage for under 2 percent,” she said. “Over the next few years, we’re going to see a number of people move off these fixed-rate mortgages after their term expires and switch to variable-rate mortgages, and those rates will be significantly higher.”
Because of the extraordinary measures the RBA took during the pandemic to reduce the cost of borrowing, an unusually high proportion of borrowers now have fixed-rate mortgages, Emmett said.
“If we look back at 2019, it was around 15 percent of people who were involved with it [fixed] prices,” she said. “But throughout 2020 and into 2021, we’ve seen this increase quite a bit, with the peak of about 46 percent of people taking out fixed-rate loans in mid-2021.”
As a result, many homeowners could see a significant increase in their repayments in the coming months and years.
“This is actually going to be a very common problem among borrowers,” Emmet said. “[That is,] to have this pretty significant increase in repayments over the next few years.”
For a borrower with a $500,000 home loan that is priced at 2 percent, a sudden 2 to 3 percentage point increase in the interest rate at the end of the fixed rate could mean increasing their repayments by $539 to $836 per month based on calculations using the Domain Home Loan Repayment Calculator.
While some homeowners have experience of servicing their mortgages at much higher interest rates than today, many first-time borrowers have only seen their repayments fall due to the RBA’s extraordinary stimulus measures during the pandemic.
“Interest rates have been very low for a long time and we know it [increase] will be a new experience for some clients,” said Andy Kerr, head of home ownership at NAB.
What can fixed-rate mortgage owners do to prepare for rising interest rates?
While the prospect of mortgage repayments increasing can be daunting, there are ways fixed rate mortgage holders can prepare before their term expires.
Check your home loan
Whether your fixed rate payment expires in six months or six days, it pays to have one Talk to your agent to review your current interest rate and loan structure, said Lianna Mills, Senior Home Loan Specialist at domain home loan.
“Your credit can be checked at any time,” she said. “With all the uncertainty right now, it’s important to understand what your options are.”
Reviewing your home loan now can help you determine if you can refinance at a lower interest rate or reset your interest rate for the certainty of future repayments.
Get ahead with your home loan
Making additional repayments on your mortgage now could help mitigate the impact of an increase in repayments in the future.
While fixed-rate borrowers likely have a cap on how much extra they can spend on their mortgage repayments, it’s worth checking what that cap is and making additional repayments now if possible, Mills said.
“Making additional repayments on your fixed home loan and making sure you stay within your additional repayment cap provides a buffer in case interest rates go up,” she said.
“This may offer some comfort, as your additional repayments will likely result in prepaying your home loan.”
For borrowers who want the security of their ongoing fixed loan, debt restructuring or refinancing before their tenure ends can be beneficial, Mills said.
“Initially you may see a surge in repayments, but the view is that later you will be in a more secure and stable position.”
How high will interest rates rise?
While all four of Australia’s major banks raised mortgage rates Consistent with the 25 basis point hike in the RBA, there is little Consensus on where and when cash price will peak.
Both the NAB and the ANZ forecast that the key interest rate will peak at around 2.5 percent. ANZ expects that to happen in the middle of next year, while NAB expects the peak to come towards the end of 2024.
Westpac has forecast a slightly lower peak of 2.25 percent by mid-next year, while CBA expects interest rates to hover at 1.6 percent by early 2023, the Big Four’s lowest expectation.
Target predictions of the four big banks
|Bank||How high will the cash rate rise?||When will the cash price peak?|
|SNAP||2.50%||end of 2024|
Information correct at time of publication. Mortgage rates are usually a few percentage points higher than cash rates.
The Reserve Bank is expected to be heavily influenced by how the economy responds to its monetary policy.
“I think they’re going to sit back and see what impact these moves are actually having [had] on the economy,” said Alan Oster, NAB’s chief economist.
“If the economy stays really strong, they could go a little bit further.”
Domain Home Loans, Auscred Services Pty Ltd Loan Agent 500208, Australian Loan License 442372.