Moving From a Fixed Interest Rate to Variable Interest Rates
Coming off a fixed rate and not prepared for higher repayments? Take a deep breath, here are 10 options when coming off a fixed rate.
Australian homeowners have experienced a period of low fixed interest rates which has provided repayment certainty. However, when the fixed term ends and the interest rates rise, it can be challenging to know what to do next. In this blog post, we’ll explore some of the options available to homeowners who are coming off a low fixed-interest rate home loan and facing higher interest rates.
If you take no action on your fixed-rate loan, it will convert to a variable-interest-rate loan upon completion of the fixed-rate period. The variable interest rate is referred to as a revert rate in your loan offer and is quite often not the most competitive variable rate from your lender.
The go-to solution for many at this point is to refinance (which may not be possible) and often just delays the implementation of a suitable solution or even worse, to sell, which may be financially disastrous or not in your best interests.
As interest rates rise, it can be difficult to obtain finance for your current circumstances as your serviceability will have been reduced. This coupled with a possible reduction in the value of your home or if you have borrowed a high-to-loan value ratio may impact your ability to refinance
So what to do?
You have taken the first step by acknowledging that the uncertainty around coming off your fixed interest rate needs attention. Read on for insights to help you….
Review your financial situation – personal spending
Before making any decisions about your mortgage, it’s essential to review your financial situation carefully. Look at your income, expenses, and other debts you may have. Determine if you can afford to make higher mortgage payments or if you need to reduce your expenses. If you have a budget in place, now is the time to review it and make any necessary adjustments. Many lenders have the ability to download your statements into an Excel spreadsheet so as to identify your spending patterns.
Consolidate high-interest debt
High-interest credit facilities such as personal loans, credit cards, store credit, or car loans are often a drain on your finances. Debt consolidation at a low-interest rate can allow you to pay off this debt sooner. If you can continue to make the same repayments (or even more) as you were making on each of the high-interest facilities, but having the debt at a lower interest rate, you will more quickly reduce your debt.
Request an interest rate reduction from your existing lender. We facilitate loan interest rate reviews when a client is coming off a fixed rate by sending through a pricing request to your lender showing other lenders competitive offers to see how low we can get their rate.
Trial higher repayments
It is wise to try making the higher repayment now, whilst on the lower fixed interest rate to see if you can meet the increased repayment amount and understand if this is sustainable. Please note that many fixed rates do not have to redraw so ensure that the increase in your payment amount is diverted to an appropriate account if you need access to this money in the future.
Increase your loan term
Extending the term of your loan can also help lower your monthly payments. For example, if you currently have a 15-year mortgage, you can extend it to a 20 or 30-year mortgage, which will lower your monthly payments. However, keep in mind that extending the term of your loan means you’ll pay more interest over the life of the loan, so you’ll need to weigh the pros and cons before making a decision.
Consider restructuring your loans to align tax-deductible debt to interest only and non-tax deductible debt as principal and interest. In many circumstances paying down the principal of your loan is a great idea but sometimes paying interest only on your investments and making additional contributions to your home mortgage is a smarter strategy. In rare cases, it may be beneficial to request interest only on your home loan (for a period) until you can implement other ways to reduce your debt.
Pay extra principal
If you can afford to do so, paying extra principal on your mortgage can help you pay off your loan faster and reduce the amount of interest you pay over the life of the loan. You can do this by making extra payments each month or making a lump sum payment towards your principal. Paying extra principal can help you save thousands of dollars over the life of your loan and help you pay off your mortgage faster.
Nobody likes to live with financial stress. You may decide to downsize your home to reduce your debt. It is important that you discuss this with your finance specialist to ensure the transition is as smooth as possible. There are ways to reduce the inconvenience and stress of this time.
Seek professional advice
Finally, if you’re unsure of what to do when coming off a low fixed-interest rate home loan, it’s a good idea to seek professional advice. A professional can help you evaluate your financial situation and determine the best course of action for your unique circumstances.
In conclusion, although creating some challenges in the short term, volatility creates opportunities. Once you are confident in your personalized solution, you may have the knowledge and confidence to acquire another property asset.
It has never been more important to obtain personalised advice. Please reach out to us here. We are here to help.
Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product. Credit Representative 508009 is authorised under Australian Credit Licence 538623.