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5 Tips to Prepare for Higher Repayments after your Fixed Rate Ends

Prepare for Higher Repayments

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Aussie households are feeling pressure from the rising cost of living. In response, the Reserve Bank of Australia (RBA) has begun raising cash rates to curb inflation.

This means that banks and lenders are increasing mortgage rates, and repayments are rising.

If you have a variable interest rate, more than likely, you are already paying more each month. But the sting hasn’t reached you yet for those with fixed-rate home loans.

The following information will explain how and why Australia’s interest rates are increasing and how even fixed rates will be affected.

Also, check out our five tips on preparing for higher repayments before your fixed term ends.

Why Mortgage Rates Are Rising

The RBA decreased the cash rate to an all-time low in November 2020 in an attempt to stimulate the economy. And since then, buyers have enjoyed super low interest rates on home loans.

The economy’s rapid recovery has resulted in an increase in inflation faster than first thought. So, in May 2022, the Reserve Bank of Australia started increasing cash rates to help handle inflation.

Upping the cash rate increases interest rates, making people less likely to want to secure a loan. In turn, the decreased housing demand dampens the overall inflation rate.

As of now, the cash rate will continue to climb until the RBA gets inflation to its target rate of between two and three percent.

Borrowers locked into variable rate home loans have probably already experienced increases in their monthly payments. But the increases are also coming for fixed-rate borrows, just as soon as their fixed term ends.

How Rising Rates Affect Fixed Interest Rates

Rising Rates Affect

Thus far, fixed-rate borrowers have been protected from these rate hikes, but this isn’t last much longer.

In reality, fixed rates have been increasing for some time now and are not at the same lows available during 2020 and 2021.

Fixed interest rates that last long-term periods are up a bit because lenders consider future cash rate increases to cover their potential losses.

You may decide you want to lock in an additional fixed rate after your current term ends, or you may choose to switch over to a variable or even a split loan. Regardless of what you choose, chances are the monthly repayment amount will be higher.

The best choice for you depends on your financial health and needs. For instance, do you like the security you get with a fixed rate? Or would you prefer flexibility and freedom with a variable rate?

Whatever you prefer, there are ways to prepare yourself for higher payments after your fixed rate ends.

5 Steps to Prepare for Higher Repayments After Your Fixed Rate Ends

1. Be Proactive with Your Loan

The first step to getting ready for higher monthly mortgage payments is taking action before your fixed term actually ends.

This is vital because if you allow your lender’s standard variable rate to kick in, you may not get the most competitive deal available.

The truth is that most lenders charge existing borrowers what is called a “loyalty tax.” You are offered a higher interest rate than a new borrower would receive.

So, rather than allowing your loan to revert, carefully explore all of your options. It may be worth your time to conduct some research on all the different types – split, variable, and fixed – to see which best meets your needs and will keep your payments down.

2. Contact an Expert for Help

Contact an Expert

Another great option is to speak with a mortgage broker or home loan specialist before your current fixed rate period ends.

Chatting with an expert about home loan options can help you understand what works for you and best ties into your future.

These professionals can thoroughly review your home loan and help compare all options. However, it may also pay off to contact a financial advisor as well. This person can help ensure it’s the right move for you.

3. Evaluate Your Financial Situation

Reviewing your monthly budget and overall financial situation before your fixed term ends may help you find additional ways to save money before your loan repayments go up.

If you can discover areas in your budget that can be reduced, this is the perfect time to make it happen. While saving on everyday costs like petrol and groceries may be tough because the cost of living is so high, it doesn’t hurt to look at costs such as internet, electricity, and insurance to see if better rates are available.

You may even be able to find savings if you compare what’s available in the market and consider switching providers. This is especially true if you haven’t taken the time to compare current prices on electricity or home insurance for a while.

Additionally, beware of discretionary spending on items such as entertainment and takeout food to free up some of your budgets.

4. Make Additional Payments

Make Additional Payments

If your fixed-rate home loan allows you to make additional payments, it’s probably a great idea to do so every month until your current rate ends. This is one of the best things you can do to give yourself a buffer before your rates rise.

Why? Because by the end, you’ll have paid off more of the loan than expected. This can be very useful if future rate hikes occur and create difficulties for you to make monthly payments.

5. Break Your Rate and Fix It Now

Finally, it may make the most sense for some people to break their current fixed rate before it ends to secure a new rate before additional hikes take place.

This step could put you ahead of future hikes and protect your mortgage from fluctuating interest rates.

For example, let’s say you have two years remaining on your fixed-rate loan term. If you break this term now and re-fix it, you could end up saving money on the rate because rates will likely rise even further before the end of your two-year period.

However, it’s crucial that you carefully consider if the costs of breaking your current term will outweigh your expected savings.

Contacting an expert can help you come up with additional steps you can take to prepare for higher payments after your fixed rate term comes to an end.

Our mortgage broker is always here to help, so please contact us today, and let’s chat!

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