Having a fixed interest rate home loan can be a relief, especially in the current climate when interest rates are climbing. But what happens when the fixed term expires?

The uncertainty of the COVID-19 pandemic caused fixed-term home loans to surge, with many lenders cutting their fixed mortgage rates below 2%.

But many of these terms are due to expire this year and some homeowners may be in for a shock as their home loans transition to a much higher variable interest rate. As a result of this and the current higher cost of living, there is potential for more borrowers to suffer mortgage stress.

Mortgage broker and Director at ACT Finance Solutions, Fiona McKinnon, said there were several options available to homeowners once fixed home loan terms ended, and it was worth asking your broker to investigate these fully before making a decision.

Last week, the Reserve Bank of Australia decided to increase the cash rate by another 0.25%, marking the ninth consecutive interest rate rise since May last year.

The move takes the cash rate to 3.35% – a new 10-year high – and there is speculation the rate could continue to rise this year.

What is the process?

Fiona said keeping an open line of communication with your mortgage broker was important if you wanted to find the best possible deal before your fixed interest rate ends.

“Your bank will normally reach out to your around one month before the expiration of your fixed rate term and offer some variable and fixed rate options,” she said.

“For peace of mind, it’s best to forward these to your broker so they can compare them against market offerings or make a request to your bank to improve the offer if it is not competitive enough.

“Alternatively, it’s a good idea to be on the front foot and ask your broker to look at options a month before the expiry date to make sure the variable revert rate is the most competitive offering in the market.”

What can I do to best prepare for this change?

Being prepared is the best defence, so ask your broker to research the most attractive offers for you in the market.

If your loan reverts to a variable rate, you will have to fork out more to service your loan. For example, if you have a $500,000 home loan, you’re likely to pay an extra $840 a month once your fixed term expires; $1254 a month on a $750,000 loan; or find an additional $1672 per month for a loan of $1 million.

However, you may be eligible for refinance rebates being offered by banks and lenders at the moment for those choosing to refinance with a new lender. These can be around $4000 and can be up to $5000.

How can I best manage any extra outgoings?

Obviously, extra income would help you to manage additional costs, but that’s not always possible. Fiona suggests trying to curb spending as soon as possible to help manage financially.

“Reduce discretionary spend and try and obtain savings with other services, for example, your mobile phone plan and insurance,” she said.

What are my options?

There are a few options available once a fixed home loan term ends, including taking the variable revert rate, re-fixing the interest rate on your home loan or refinancing with another lender.

• Revert to the variable rate: If you can still afford your home loan repayments, you may opt to switch to a variable interest rate and continue paying off your current home loan. However, in the existing economic climate, this could mean that future rate rises may impact you and increase your repayments.
• Re-fix: Some lenders will allow borrowers to fix the interest rate again once your fixed term expires. The new fixed rate is unlikely to be the same as the expired rate but it should give a level of comfort that your household budget won’t be affected by further rate rises.
• Refinance: If your current lender’s variable rate is higher than expected and you can no longer comfortably afford, you may opt to refinance and switch your mortgage to another lender. Just be mindful that you will need to fulfill the new lender’s eligibility requirements and there may be fees and charges involved in the refinancing process.