Key Points:
- The RBA expects 880,000 fixed-term mortgages will end this year, meaning higher repayments for those behind them.
- These customers will likely face "horribly uncompetitive" revert rates.
- Here's what you can do to try and get a better deal.
Hundreds of thousands of fixed-rate mortgages established during a period of ultra-low interest rates are set to expire this year, meaning many households are bracing for significantly higher monthly repayments.
These customers are almost certain to face "horribly uncompetitive" revert rates once their fixed term expires, according to Sally Tindall, the director of research at financial comparison site Rate City.
Ms Tindall says customers should take action in a bid to secure the best deal possible.
"If you’re on a fixed rate, whatever you do, don’t do nothing," Ms Tindall said.
"Banks typically roll customers on to their revert rate [the variable rate the loan 'reverts' to], which is usually horribly uncompetitive.
"Diarise the end date of your loan and start comparing your options at least two months out."
More than 800,000 people facing 'significant' rate hikes
The Reserve Bank of Australia (RBA) started hiking the official cash rate, which influences how banks set their interest rates, in May last year from a record low of 0.1 per cent in order to The rate was at that level for 16 months, but it is now at 3.6 per cent after 10 consecutive rises.
Philip Lowe, the RBA's governor, has previously said that due to rates having increased, customers behind 880,000 fixed-term mortgages will face a "very significant increase in their loan repayments" when they move to a variable rate after their fixed-term comes to an end this year.
For these s, that could mean repayments amounting to hundreds of dollars extra each month, Ms Tindall said.
How customers can shave hundreds off their repayments
RateCity looked at a scenario where a customer had inked a $500,000, 25-year loan on a two-year fixed term in May 2021 at a rate of 1.92 per cent — which it said was the average at the time. It said they would be paying $2,099 a month.
Should the cash rate increase from 3.6 per cent to 3.85 per cent - a peak predicted by the Commonwealth Bank and Westpac, RateCity expects a customer with one of Australia's big four banks would be paying a revert rate of about 7.2 per cent - or $3,469 a month.
Negotiating could bring that down to about 6 per cent, or repayments of $3,132 a month, RateCity said.
Refinancing to one of the lowest variable rates, which the financial comparison site believes will be around 5.25 per cent in May this year, would result in repayments of $2,925 a month.
Hundreds of thousands of thousands of fixed-rate mortgages established during a period of ultra-low interest rates are set to expire this year, meaning many households are bracing for significantly higher monthly repayments. Source: AAP / James Ross
Options for those facing 'mortgage prison'
Ms Tindall acknowledged refinancing might not be an option for everyone, particularly those in a weak equity position, or who haven't had a pay rise as rates have increased. Equity is the difference between how much the property is worth and how much is still owed on the mortgage.
"People who bought in the last couple of years could find their equity has slid into a position where they can’t refinance without paying an arm-and-a-leg in lenders' mortgage insurance. Others could find they can’t refinance at all because their equity is bordering on, or below, zero," she said.
"The other way borrowers could find themselves in mortgage prison is because they can’t pass the new bank’s serviceability tests. Banks have to test every new customer’s ability to repay their loan even if rates rose by a further 3 per cent – even refinancers. While this test was a relatively easy hurdle to clear when rates were at record lows, it’s a much harder one to clear now rates are significantly higher."
But even those in a "mortgage prison" should still get on the phone to their lender, Ms Tindall said.
"The bank might not know you’re wedged, so play your hand confidently and ask for the best deal possible," she said.
"Before you call, check what rate you’re going to roll on to and compare it against other loans your bank is offering new customers. You might decide you want to switch to a no-frills option that has a lower rate and fees – just make sure you get the new customer rate which is typically lower."
Steve Mickenbecker, group executive at financial comparison site Canstar, said people should consider refinancing their mortgages, but added there was an inherent risk they won’t be approved and could get trapped at an unfavourable rate.
“The bank may tell you you have not got the capacity to earn enough money to pay off the debt, or you haven’t been making repayments consistently in the past."
Mr Mickenbecker said many people will be able to absorb the higher repayments on a variable rate.
"But some people may not be able to handle this so-called cliff and need to sell and that could be a less than ideal situation because they’re selling in a cooling property market and they may not be able to make back the deposit they’ve worked hard to save."
The RBA's minutes from its 7 March board meeting noted members will consider a pause on interest rate rises when it reconvenes on 4 April, but stated more rises could be necessary to tackle inflation.
Westpac and the Commonwealth Bank predict the cash rate will peak at 3.85 per cent.
ANZ and NAB forecast it will top out at 4.1 per cent.
