There has been a lot of talk about the “fixed interest rate cliff” being one of the biggest potential risks to housing market values and the overall stability of our property markets in 2023.
With my guest today, independent financial advisor Stuart Wemyss I plan to explain what the cliff is, some must-know pieces of information that put the cliff into context, and what you need to do if your fixed rate or interest-only term on your mortgage is about to expire.
Mortgage rates fell dramatically during the pandemic.
This was particularly the case for ‘fixed rate loans’ terms which were available for as low as 1.95% in May 2021 for owner-occupiers.
The RBA noted in the Financial Stability Review that around two-thirds of the 35% of outstanding fixed mortgage debt would expire in 2023.
Hence the ‘cliff’: around 23% of all outstanding mortgage debt will be re-priced over the course of the year, and re-priced at a much higher rate.
When fixed terms come to an end, borrowers will need to refinance their loans.
- If your fixed rate is maturing, you have two options.
- You can re-fix your interest rate for another term or
- You can allow the interest rate to roll over onto a variable rate.
- Current fixed rates range between 5.39% and 6.10% p.a. for owner-occupiers and 5.69% to 6.70% p.a. for investors.
- Variable interest rates range between 4.75% to 4.90% p.a. for owner-occupiers and 5.30% to 5.50% p.a. for investors on interest-only repayments.
- As such, fixed rates don’t look attractive for several
- It is very likely that we are at or close to the top of the interest rate cycle. So, there’s limited value in paying a premium to protect yourself against potentially higher interest rates in the future.
- Fixed rates may become attractive again when/if the yield curve inverts because it reduces the bank’s term borrowing costs and allows them to offer more attractive fixed rates.
- Until that happens, we typically recommend rolling over onto a variable interest rate.
Interest-only term expiry:
- There are two common matters you should consider:
- Cash flow and
- Interest rates
- The advantage of repaying interest only is that you minimize your monthly commitment.
- The downside to interest-only loans is that they attract higher interest rates.
- Interest-only loans attract a higher interest rate of 0.26% p.a. (on average) compared to principal and interest investment loans (or a 0.55% p.a. premium for interest-only home loans) – that is the premium you pay during the interest-only loan term.
We suggest reviewing your whole mortgage portfolio at one time instead of reviewing loans individually.
Doing so ensures that you achieve the best overall outcomes.
When reviewing your loan portfolio, it is wise to consider a few matters such as:
- Will your borrowing capacity change in the future?
- Do you expect to sell or buy property in the future?
- Do you have adequate buffers in place?
- Does the bank need all properties as security?
- Would you like to access equity?
- Can you consolidate loan accounts and/or clean up your structure?
- Is your current lender under-valuing your property?
- Do your lender’s policies still suit your circumstances?
- Would you like to help your children in the future?
When to start considering your options
Typically, we advise clients to engage us 2 to 3 months before any fixed rate or interest-only term expiration.
This usually provides enough time for us to research their options and leave enough time to complete a refinance to a new lender should that be necessary.
Of course, if you expect your borrowing capacity or circumstance to change, you might need to begin sooner.
Different client circumstances and lenders may dictate different approaches but typically we follow these steps:
- Research your options. If your fixed rate is expiring, then you must ensure the variable rate that will eventually apply to your loan is competitive.
If your interest-only term is expiring, your broker will need to investigate whether your lender will permit another interest-only term and if so, what the process is to obtain one.
- Speak to your lender. Once your broker has completed all that research, they should speak to your existing lender and request that they match the highest competitor bank discount.
- Submit a discharge authority. If your lender refuses to play ball and match a better offer, you may need to refinance.
- Begin the refinance. If you must switch to a new lender to obtain a fresh interest-only term or lower interest rate, so be it.
Links and Resources
Stuart’s Blog: - What to do if your fixed rate or interest-only term is due to expire
Stuart’s Book – Rules of the Lending Game & Investopoly
Some of our favourite quotes from the show:
“Even if you’ve got a loan with the bank, having a finance strategist on your side is extremely helpful.” –Michael Yardney
“I learned that lesson the hard way in the early 90s when interest rates went up, when values of properties – I owned a lot of commercial properties in those days – went down - having financial buffers in place made a big difference. – Michael Yardney
“I guess this keeps reinforcing the fact that you shouldn’t be going directly to the banks, but you should work with a finance strategist.” – Michael Yardney
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