Shock expected for fixed-rate borrowers

Data just released shows a large number of Australian home owners are facing a significant increase to interest rates when their fixed-rate term ends.

Investment bank Morgan Stanley estimated that the big four banks have originated more than $550 billion of fixed-rate loans since the 2018-19 financial year, and that about $400 billion of these loans (or 73%) will expire and convert to variable interest rates by the end of 2023.

Based on Reserve Bank data, Morgan Stanley found that the average fixed-rate borrower was paying 0.65 percentage points less in interest than the average variable borrower in May 2022. So if, as some economists expect, the Reserve Bank increased the cash rate by between 1.50 and 2.00 percentage points by the end of 2023, borrowers who moved from a fixed to a variable loan could face a rate rise of between 2.15 and 2.65 percentage points.

What can you do if you have a fixed-rate loan?

Firstly, it is important to note the expiry date of the fixed term on your loan. This is the date the loan will convert to a variable rate, which may not be a competitive rate or have the features you want. A few months out from that time, we can play hardball with over 60 lenders to find the right deal for you to move to at the end of your term.

Secondly, we can have a look at your loan to see if there is any flexibility in paying your loan off faster. If not, you may choose to put aside as much as you can while paying a lower interest rate, to then put toward paying off the property when moving to the next loan, which can help lower your loan-to-value-ratio (LVR).

The end of a fixed-rate term is a great time to re-evaluate your financial goals to work towards an appropriate solution. Your increased equity in your property could entitle you to a more competitive interest rate, or you may wish to refinance to free up funds for other needs, such as renovations.

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