Fixed Interest Rate Expiring? Here’s What You Need To Know

Australian home buyers overwhelmingly hold variable rate mortgages. But during the Covid-19 pandemic, when interest rates fell to record lows, there was a surge in demand for fixed loans at rates around 2%. 

Many of those fixed loans of two or three years in length started to expire early last year, by which time variable interest rates had hit 6%, thanks to a spate of rate hikes by the Reserve Bank to curb inflation. That meant many borrowers were in a situation where their repayments would jump three or fourfold, prompting fears of a ‘mortgage cliff’.

According to RBA data, around 880,000 mortgages came off fixed rates in 2023, but a significant number still remain.

“While many fixed-rate loans expired in 2023, we know from RBA data that 35 percent of those low-rate fixed loans from late 2022 are still outstanding. These are set to expire throughout 2024, meaning a number of borrowers will still face the switch to higher variable rates,” says Barbara Giamalis, lead broker at lender and mortgage broker Tiimely Home, (formerly known as Tic:Toc Home Loans). 

“It’s not quite the cliff we initially expected, but it’s still a significant bump in mortgage repayments for many Australians.”

While the refinancing trend will not be as strong as last year, she says it will likely continue as people look for cheaper interest rates, especially if market predictions that interest rates do not come down this year or even increase, come true.

RBA assistant governor Christopher Kent noted in June that the remaining low fixed-rate loans from the pandemic era will expire this year, which will add around 20 basis points to the average outstanding mortgage rate.

At a broad level, resilient Australian households appear to have successfully navigated the worst of the mortgage cliff fears, with no massive surge in the arrears rate.

In its latest Financial Stability Review released in March, the RBA found less than 1% of all housing loans were in arrears for 90 or more days. While lenders have a small but rising number of borrowers on temporary hardship arrangements,  the numbers remain low on a historical basis.

The report attributed this to most households building up significant savings buffers during the pandemic, a continuing strong labour market that has supported household incomes, and many consumers adjusting their spending in areas like retail and hospitality to ensure steady mortgage repayments.

However, many industry experts argue that the overall numbers tend to hide patches of significant stress within the mortgage sector.

“Borrowers who switched from fixed to variable rates are definitely feeling the pinch. Those low fixed rates they enjoyed are jumping to the currently higher variable rates, which can be a significant increase,” says Tiimely’s Giamalis. 

She points to the latest CoreLogic figures released earlier this month, which showed arrears reached 1.6% in the March quarter. 

“This is the highest (that) arrears have been since the beginning of 2021. It’s certainly a concern with rising rates.”

She suggests reaching out to your broker or bank and speaking with their hardship officer, if you’re struggling with your repayments. They can discuss options like changing your loan terms, temporarily pausing repayments, or even reducing your monthly amount. 

“The last thing banks want is for you to default. By working with your bank, you can find a solution that helps you stay afloat,” she said.

People coming off fixed loans from two years ago are experiencing a significant jump in rates, from around 1.9% to 6%. As a result, many are looking to refinance to obtain a better rate than what they have been offered.

Although refinancing isn’t as robust as last year, many consumers are still pursuing it to secure the best rates. Individuals under financial pressure are actively seeking savings opportunities as borrowers anticipate potential interest rate cuts next year.

As of June 2024, most major banks are refinancing mortgages at variable rates of around 6.14% for owner-occupied properties and 6.44% for investors. 

Some digital or non-bank lenders like Tiimely offer slightly lower rates at 5.94%.

The interest rate varies depending on the lender, the loan to value ratio (LVR), and the applicant’s financial history. If the applicant has a poor financial record, their interest rate may be higher, varying anywhere between 5.94% to 9%, depending on the client’s serviceability and credit history. 

Giamalis says it’s important to check which rate you’re on at least once every 12 months as there could be a better rate you’re eligible for. This is where a broker can help you complete a home loan health check.

Typically, your home loan will revert to the lender’s standard variable rate at the end of your fixed term. While this may sound like the easiest option to take, these rates are often higher than other deals on the market.

This is why for those coming off a fixed-rate mortgage, it’s crucial to shop around or talk to your bank. 

With interest rates currently sitting at 12-year highs, many people are also finding themselves as “mortgage prisoners”, where they are unable to refinance due to their incomes not being able to service the higher rates. 

Rates have jumped from 1.9% two years ago, to over 6% now, making it challenging for many to refinance.

“Don’t feel disheartened, talk to a mortgage broker to explore options for improving your refinancing eligibility. With the… stage three tax cuts in July, it’s a good time to understand how these changes might affect your ability to afford a better home loan rate,” Giamalis says.

Ironically, some lenders are seeing a slight uptick in fixed rate mortgages as homeowners look to shield themselves from any potential additional interest rate hikes.

However, one point to consider with a fixed rate mortgage is that if the customer breaks earlier, they can be liable for payment in advance fees and penalty interest. Another consideration is that you can only pay a certain amount per year extra with fixed rates and you generally don’t have an offset against it, although some digital lenders offer fixed rate home loans with an offset.