Borrowers coming off low fixed rates may see their repayments double.
Roughly 880,000 fixed-rate mortgages will come to an end this year, according to the Reserve Bank of Australia’s (RBA) estimates, after many borrowers chose to lock in ultra-low rates during COVID.
Borrowers facing this ‘mortgage cliff’ will be hit with the full force of 11 rate hikes, following the RBA’s decision to again increase rates yesterday.
Rate Money CEO Ryan Gair said borrowers coming off fixed-rate loans would likely see their repayments double, but that there were solutions available.
1. Get your property revalued
While the property market may be on the road to recovery, there are some parts of the market that are seeing declines. If you think the value of your property will decrease, Gair recommended getting the bank to revalue it now instead of waiting until your fixed rate ended.
“Banks assess the value of your home on current comparable sales. You don’t even have to settle the day you return your paperwork – most lender evaluations last between 90-180 days so you can coincide it with your fixed-rate term ending,” Gair said.
Gair said this could be the difference between having enough equity to refinance or not.
2. Consolidate debts and consider interest-only
If you are experiencing cash flow issues, considering moving to an interest-only loan or consolidating debts (car loans, credit cards) could be a solution for the immediate term.
“This could be a great way to reduce your monthly repayments over the next two or so years. It will free up cash flow and help your financial positioning, while alleviating stress,” Gair said.
3. Look beyond mainstream lenders
Borrowers may be able to get a better interest rate by looking beyond the major banks, Gair said, and each bank will have different serviceability requirements.
“A different lender might be able to help you find a better solution for your circumstances and approve your loan,” he said.
4. Don’t make multiple applications
It can be tempting to apply for loans with multiple lenders at the same time, But this can actually negatively impact your credit rating.
“Banks can see that you’ve gone to two or three lenders and will consider this a red flag. A lower mortgage score will also make it harder to get approved,” Gair said.
5. Negotiate a better rate
If you are facing a ‘mortgage prison’ and are unable to refinance to another lender, Gair said to speak to your current bank and negotiate.
“Research the current interest rates available in the market and call your bank to negotiate a better deal in line with this,” Gair said.
“Banks are looking to hold onto customers for as long as possible, so the majority will give you a better rate for your loyalty.”
Gair is calling for APRA to change the rules for borrowers looking to do “dollar-for-dollar refinancing” by removing the current serviceability buffer. He said this would see fewer borrowers stuck in a mortgage prison.