How Can Refinancing Help with a Fixed-Rate Cliff?
You have probably heard of the term “fixed-rate cliff” in finance news feeds, but what is it? And if you are about to head over it, how can you prepare for a soft landing?
What does this so-called “cliff” mean for your budget and how can you reduce the impact by refinancing?
Why Is Fixed Rate Cliff Looming in 2023?
Before 2020, fixed rate mortgages equated to about 20% of total Australian home loans. But during the pandemic, the RBA dramatically slashed the cash rate to a record low of 0.10% and many savvy Australians pounced on the opportunity to lock in a low interest rate in early to mid-2021 for two to three years. This saw 2021 fixed-rate borrowing basically double to 40% of total Australian home loans. However, as with all good things, the low rate times have come to an end.
Since May 2022, the RBA has hiked the official cash rate back up to 3.60%. Those on fixed-rate loans have had a reprieve until now, with 880,000 mortgage holders set to start rolling off their fixed rate throughout 2023. And CoreLogic warns that “the pain will be felt most acutely from April” this year.
What Effects Can a Fixed Rate Cliff Have?
According to CoreLogic data, a mortgage holder who took out an average-sized loan of $538,936 with a fixed rate of 1.98% could see their repayments increase by over $1,000 per month when rolling over to a standard variable rate.
Those who locked in 2020/2021 interest rates that hovered around the 1.75% to 2.25% range will be transitioning to interest rates as high as 5% to 6%. That is an increase greater than the 3 percentage point minimum interest buffer that lenders use to assess the serviceability of home loan applications.
How Do You Refinance Properly?
When a fixed-rate loan period ends, lenders often don’t roll existing clients over to the best rates they have on offer. The most attractive interest rates are usually reserved for new customers as an incentive. But by refinancing with another lender, you can access lower introductory rates, which can potentially save thousands of dollars in repayments over time.
Working with a broker like us can take the stress of your shoulders when navigating the end of a fixed rate period. We use our vast network of lenders to zone in on suitable loans and lenders that are right for you. And importantly, we will bound by a best interest duty.
While banks and digital lenders might try to tempt you with cashback offers for loan products that may not really be in your best interests due to fees, high interest rates and other undesirable loan terms, we will only ever try and match you with lenders and loans that are in your best interests.
Frequently Asked Questions
What is a Fixed-Rate Cliff?
A fixed-rate cliff refers to a situation where a significant number of homeowners transition from low fixed-rate mortgages to higher variable rates, often leading to increased financial strain.
Why is the Fixed-Rate Cliff relevant in 2023?
The RBA has increased the official cash rate, affecting those who had locked in low interest rates in the past. Many of these fixed-rate loans are set to expire in 2023, leading to higher repayments for homeowners.
How can refinancing help me if I'm facing a Fixed-Rate Cliff?
Refinancing can allow you to switch to a lender offering lower interest rates, potentially saving you thousands of dollars over time. Working with a broker can help you find the most suitable loans and lenders.
What are some other options if refinancing isn't viable for me?
You can consider extending the length of your loan to reduce monthly repayments, consolidating debt, or building up a cash buffer to manage the transition more smoothly.
How can Zippy Financial assist me in this situation?
Zippy Financial can help you explore refinancing options, identify suitable loans and lenders, and even help you with debt consolidation or other strategies to manage the transition effectively.
Are there any risks involved in refinancing?
While refinancing can offer lower interest rates, it's essential to consider any fees, terms, and conditions that may apply. Always consult a financial advisor or mortgage broker to understand the implications fully.
Get in Touch with Us
If your fixed-rate cliff is looming, get in touch today and we will work on finding you great refinancing options to soften the landing.
And if the landing is still looking a little bumpy, we can help you explore some additional options, such as increasing the length of your loan and therefore decreasing monthly repayments, debt consolidation or helping you identify ways to build up a bit of a cash buffer in the meantime.
Whatever your situation, the earlier we sit with you and help you plan, the better we can help you manage the transition.
Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.