What is the fixed rate cliff and how can refinancing help?

You’ve probably heard the term “fixed-rate cliff” in the news lately. But what is it? And if you’re heading toward it, how can you control your landing?

A staggering 880,000 fixed-rate loans are set to end this year, and when they do, many Australian households will be facing significantly higher mortgage repayments.

That’s because the variable interest rates now on offer are much higher than the fixed rates locked in years ago.

Below we’re talking about what this so-called “cliff” might mean for your home loan, and your budget, and how you can reduce the impact by refinancing.

Why is the fixed rate cliff looming in 2023?

Before 2020, fixed-rate mortgages equated to about 20% of total Australian home loans.

But during the pandemic, the RBA dramatically slashed the cash rate to a record low of 0.10%, and many savvy Australians pounced on the opportunity to lock in a low interest rate in early to mid-2021 for two to three years.

This saw 2021 fixed rate borrowing basically double to 40% of total Australian home loans.

However, as with all good things, the low-rate times came to an end.

Since May 2022, the RBA has hiked the official cash rate back up to 3.85%.

Those on fixed-rate loans have had a reprieve, until now – with 880,000 mortgage holders set to start rolling off their fixed rate throughout 2023.

And CoreLogic warns “the pain will be felt most acutely from April” this year.

What effect could the fixed rate cliff have on you?

According to CoreLogic data, a mortgage holder who took out an average-sized loan of $538,936 with a fixed rate of 1.98% could see their repayments increase by over $1000 per month when rolling over to a standard variable rate.

Those who locked in 2020/2021 interest rates that hovered around the 1.75 to 2.25% range will be transitioning to interest rates as high as 5 to 6%.

That’s an increase greater than the 3 percentage point minimum interest rate buffer that lenders use to assess the serviceability of home loan applications.

How can you refinance properly and quickly?

When a fixed-rate loan period ends, lenders often don’t roll existing clients over to the best rates they have on offer.

The most attractive interest rates are usually reserved for new customers as an incentive.

But by refinancing with another lender you can access lower introductory rates, which can potentially save you thousands of dollars in repayments over time.

Working with a lending specialist can take the stress off your shoulders when navigating the end of a fixed rate period.

Our team have access to a wide range of lender and home loan options. It’s also about finding the right home loan for you.

And importantly, unlike the banks, we’re (happily) bound by a best interests duty.

While banks and digital lenders might try to tempt you with cashback offers for loan products that may not really be in your best interests (due to fees, high interest rates, and other undesirable loan terms), we’ll only ever try to match you up with home loans that are in your best interests.

We’re here to help

Is your fixed-rate cliff looming?

Get in touch and one of our lending specialists will get to work on finding you great refinancing options to soften the landing.

And if the landing is still looking a little bumpy, we can help you explore additional options, such as increasing the length of your loan and therefore decreasing monthly repayments, debt consolidation, or helping you identify ways to build up a bit of a cash buffer in the meantime.

Whatever your situation, we’re here to help.

Understanding your options can start with a simple phone, web, or in person discussion.

This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.