What happens after my fixed rate mortgage ends?

What happens when my mortgage ends? Everything you need to know

What happens after my fixed mortgage rate ends? Households find themselves wondering this amid the highest interest rates in over a decade and the looming ‘mortgage cliff’.

Australians are facing a fixed rate ‘mortgage cliff’ with an estimated 880,000 fixed rates set to expire by the end of 2023.

Many households will come off record-low rates set during the COVID-19 pandemic, onto variable rates amid the highest interest rates in over a decade.

The average fixed rate on offer of 6.54% is a steep hike from those as low as 1.95% during the pandemic.

According to The Guardian, borrowers servicing a $576,985 mortgage need to find an extra $1250 a month since The Reserve Bank of Australia (RBA) has increased the cash rate a dozen times in just over a year.

With the looming fixed mortgage cliff, it is important to know what happens after your fixed rate mortgage ends so you can be prepared to navigate increased repayments.

This guide covers everything you need to know about what happens after fixed rate mortgages end.

What is a fixed rate mortgage?

When applying for a mortgage, you can choose from a fixed or variable rate home loan.

On a fixed rate mortgage, the interest is locked in place or ‘fixed’ for a set period (typically one to five years) and does not change, even if interest rates fluctuate.

Conversely, a variable rate can fluctuate depending on the RBA’s cash rate and other factors.

A third option, a ‘split’ mortgage, is a combination of both fixed and variable home loans. Borrowers split their mortgages into two parts - one with a fixed interest rate and one variable.

What happens after my fixed rate mortgage ends?

Your lender or mortgage broker will typically contact you before your fixed rate ends to discuss your options.

You will need to choose from the options your current lender provides you with, often re-fixing your loan or switching to a variable rate.

• Re-fix: Select a new fixed rate and period (how long you want to fix the rate for) with your existing lender.
• Switch to variable rate: Changing to the variable rates on offer. Your lender will have a ‘revert’ (default) rate, but a broker can help negotiate or find better rates.
• Refinance: Taking out a new loan with a new provider while also potentially unlocking any equity in your home. A UNO broker can help you navigate this process.

When it comes to fixed periods ending, the worst action is inaction.

If you do nothing, your lender will likely move you to its revert rate (standard variable rate/SVR) - the default, higher interest rate.

This rate could you hundreds of dollars a month and is sometimes worse than what the lender offers other customers. So it is important to pay attention when your fixed rate is ending.

Should I fix my mortgage rate or wait?

There are many factors to consider when deciding between a fixed or variable rate, most notably your personal financial situation and the cash rate.

In Australia, the cash rate is the official interest rate at which banks borrow money from other banks. It is set by the Reserve Bank of Australia (RBA), which has regular board meetings to adjust the cash rate.

If cash rates are likely to increase, fixing your mortgage at a lower rate might be a good idea while the opposite is true if they are set to decrease.

According to The Conversation, 27 leading economists predict the cash rate will reach 4.5% by December 2023 before falling to 4.3% in June 2024 and then to 3.9% by the end of the year.

Of course, knowing where interest rates might end up is difficult; even for the RBA itself. Experts claim variable rates are historically better in the long term, although it is hard to predict the future.

If you value certainty and can find a good rate, fixing for peace of mind might be a good idea. But if you are unhappy with the rates on offer, choosing a variable rate might be the way to go.

Watch: should I fix my home loan or stay variable?

In the above explainer, UNO Founder Vincent Turner says it’s always important to run the numbers and speak to a UNO broker who can help step through the process with you.

Can I extend my fixed term?

No, you cannot extend a fixed term on your mortgage. Once your fixed term has expired, you will be invited to re-fix your mortgage at a new rate or explore other options like switching to a variable rate or refinancing.

What happens if interest rates change during my fixed rate period?

If cash rates change while you are on a fixed rate, your repayments will stay the same.

However, cash rate changes during your fixed period will impact future rates when it is time to refinance.

For example, a 1% cash rate rise on a $600,000 (30 years at 4%) mortgage could increase your repayments by an extra $356 a month^ (once your fixed period ends).

Higher repayments will not come into effect until your fixed rate has ended, but it is important to pay attention to the cash rate so you can shop around for a better rate.

A UNO broker can help find you the best rate from more than 20 lenders.

Can I leave a fixed rate mortgage early?

You can exit - or ‘break’ - a fixed rate mortgage early, but you will be subject to fees including break fees and early repayment charges (ERCs).

When you enter a fixed contract with a lender or bank, they borrow money from the market at wholesale interest rates based on the assumption that you will make agreed repayments until the period’s end.

Wholesale interest rates change. So failing to make agreed repayments for the fixed period can cost your lender money, which they re-coupe through early repayment charges (also called adjustment fees).

Break fees are payable to your lender when you exit a fixed rate mortgage before the fixed period ends. Costs vary by lender, but can include a flat or percentage-based fee.

If you make too many additional repayments on a fixed rate, you may be subject to ERCs.

It is essential to check and understand your mortgage agreement before considering breaking a fixed rate mortgage early. Your broker can help with this.

What’s the difference between fixed and variable rates mortgages?

The difference comes down to how interest is calculated on the mortgages. A fixed interest rate stays ‘fixed’ for a set period (term) while a variable rate changes over time.

So, a variable rate changes as the cash rate increases or decreases while a fixed on stays ‘fixed’ in place regardless of what the cash rate does.

You can read more about fixed and variable rates in our article here.

Benefits of fixed rates

• Protection from rate increases - If the cash rate increases, your repayments stay the same, protecting you from any increases for the fixed term.
• Stable repayments - Once your repayments are locked, knowing how much your mortgage costs
• Ability to budget - Stable mortgage repayments will help you budget for other expenses.
  

Drawbacks of fixed-rate mortgages

• May lack features - Unlike variable rates, fixed rate loans can lack features like offset accounts.
• Could miss rate cuts - You could miss benefits if the cash rate goes down and your mortgage is fixed at a higher rate.
• Limited ability to make voluntary repayments - Fixed loans have stricter extra repayment rules than variable ones, meaning a fixed mortgage may not be for those seeking to pay down their mortgages faster.

Can I refinance if I am on a fixed rate mortgage?

You can refinance a fixed rate mortgage during the fixed period or when it ends. Leaving a fixed mortgage early will result in break fees so it is important to pay attention to these.

Refinancing could help you find a better deal, unlock equity in your home or even consolidate debt.

However, it is important to consider the costs of doing so—including break fees and application fees—before deciding. Always speak to a professional before making financial decision.

Refinancing with the help of loanScore

You’re not alone if you don’t like paperwork and crunching numbers. An estimated 74% of Australians don’t bother refinancing because they feel it takes too much effort.

But what if you could check for a better home loan deal in under ten minutes?

UNO’s loanScore™ technology is a free check-up on your home. It helps you understand whether your home loan is in good shape, providing a score based on whether you could save with another deal.

It is free and does not impact your credit score. Getting your loanScore™ takes as little as two minutes. Get yours today.

Preparing for higher repayments when your fixed period ends

Higher mortgage repaymets are a reality for many coming off fixed interest rates. Here are some tips to prepare for higher repayments:

• Know your current mortgage - Farmirise yourself with your current mortgage contract, including its terms and conditions and important dates like when your fixed rate ends.
• Check your household budget - Review your household budget, including expenses like mortgage payments, utilities, and leisure items. Are there any areas you can cut back on?
• Make extra repayments - Making extra mortgage payments can help build a buffer for when your fixed rate ends and your repayments might increase.
• Have an emergency fund - Setting money aside for emergencies can help build a runway should face challenging financial circumstances or fail to meet repayments.
• Negotiate - Borrowers pay a ‘loyalty’ tax by staying with one lender and defaulting to the standard variable rate. Be sure to negotiate for a better rate with your lender.
• See a broker - A UNO broker can help assess your situation and find a better deal based on over 20 lenders.

How can a mortgage broker help me if my fixed rate mortgage is ending?

A UNO broker can help you step through the whole process of finding a new mortgage product whether you want to stay with your current lender or switch to a new one.

They simplify the whole process, saving you time and money by finding the right mortgage to meet your needs.

At UNO, our Customer Care Program always puts you first by regularly checking in on your current loan and future plans so we can help find not just your current mortgage, but future ones.