The Fixed-Rate Cliff: Can Refinancing Help?

April 12, 2023
fixed-rate cliff

Key takeaways:

  • 880,000 fixed-rate loans set to end in Australia this year, leading to significantly higher mortgage repayments.
  • Mortgage holders who took out fixed-rate loans in 2020/2021 will face interest rates as high as 5 to 6%.
  • Homeowners can reduce the impact of the fixed-rate cliff by refinancing with a broker like Soho Home Loans.

You’ve probably heard the term “fixed-rate cliff” bandied about in finance news feeds. But what is it? And if you’re about to head over it, how can you prepare for a soft 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. And with the RBA increasing the cash rate consistently, they may continue to raise as well.

So today we look at what this so-called “cliff” might mean for your budget and how you can reduce the impact by refinancing.

What is a fixed-rate cliff?

In Australian finance, a fixed-rate cliff refers to a situation where a large number of fixed-rate home loans are set to end, and mortgage holders will need to transition to variable interest rates, which may result in significantly higher mortgage repayments.

But first, 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 3.60%.

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 implications can a fixed rate cliff have

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 to refinance the right way

fixed-rate cliff

Lenders frequently fail to extend their best available rates to existing clients when the fixed-rate loan term ends. Instead, they tend to reserve the most favorable interest rates as a perk for new customers.

However, if you opt to refinance your loan with another lender, you may be able to secure lower introductory rates. This could result in substantial savings on repayments over an extended period.

Navigating the conclusion of a fixed-rate period can be daunting, but enlisting the help of a broker like us can ease the burden. We possess an extensive network of lenders and can assist you in identifying appropriate loans and lenders tailored to your specific requirements.

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

So 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 lenders and loans that are in your best interests.

Get in touch with Soho Home Loans

Are you approaching the end of your fixed-rate loan period?

Reach out to us at Soho Home Loans now, and we’ll commence searching for optimal refinancing alternatives to cushion the impact of the transition.

If the situation still appears to be a bit challenging, we can guide you in exploring supplementary possibilities. For instance, lengthening your loan term to reduce your monthly repayments, consolidating your debts, or identifying strategies to accumulate a cash reserve in the interim.

No matter your circumstances, the sooner we collaborate with you to devise a plan, the more effective our assistance will be in helping you manage the shift.

Will fixed rates fall?

No, fixed rates will not fall in the near future. In fact, fixed rates may continue to rise as the Reserve Bank of Australia has already hiked the official cash rate back up to 3.60% since May 2022.

What is the meaning of fixed-rate?

In the context of Australian finance, fixed-rate refers to a type of home loan where the interest rate is fixed for a certain period of time, usually 1 to 5 years, regardless of the changes in the market interest rates during that period.

What is fixed vs float rate?

Fixed rate means the interest rate is fixed for a certain period of time, while a floating or variable rate means the interest rate can change periodically based on market conditions. Fixed rates provide certainty and protection against rising interest rates, while floating rates offer flexibility and potentially lower interest rates if market rates go down.

Soho is your expert team in Australian real estate, offering an innovative platform for effortless property searches. With deep insights into buying, renting, and market trends, we guide you to make informed decisions, whether it's your first home or exploring new suburbs.
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