Many Australians rushed to lock in interest rates during the height of the pandemic, as fixed rates plummeted to never-before-seen lows.
These ultra-low fixed rates were driven by the Reserve Bank of Australia’s Term Funding Facility (TFF). The TFF was part of the RBA’s monetary response to the pandemic, offering cheap funding to the banks to encourage them to lend to households and businesses.
The fixed-rate boom peaked in July 2021, just as the TFF ended, when 46% of all new home loans were fixed (compared to a historical average of around 15%).
Many of these deals are winding down now, with the Commonwealth Bank alone expected to have $100 billion of fixed-rate mortgages rolling over into variable rates by the second half of 2023.
These borrowers will likely face a very different lending environment from when they took out their fixed-rate loan, with the RBA expected to make multiple hikes to the cash rate in the near future, taking it from its current setting of 0.85% to a forecast 2.50% by the end of 2023. As that happens, variable mortgage rates will rise as well.
With that in mind, what should you do when your fixed-rate period ends?
Beware the loyalty tax
At the end of your fixed-rate term, your home loan will revert to your lender’s standard variable rate or SVR. In the current lending environment, the SVR will almost certainly be higher than the fixed rate you’ve left behind.
It’s also likely to be higher than the variable rate offered by that lender to new borrowers, thanks to something known as the ‘loyalty tax’.
The loyalty tax is when lenders offer discounts on the SVR to tempt new borrowers to sign up. However, existing home loan clients are penalised for their loyalty as they still pay the much higher interest rate.
As the RBA graph above shows, the difference in these two interest rates was, on average, 45 basis points in April 2022.
That might not sound like much, but seemingly small differences in rates can quickly stack up over time.
As a result, Australia’s competition regulator, the ACCC, in its home loan price inquiry, found the loyalty tax was costing many borrowers tens of thousands of dollars over the life of their home loans.
Don’t want to pay a loyalty tax? Thankfully, you do have other options. These include:
Refinancing your home loan for a better rate
Switching to a new, more competitively priced loan is one of the best ways of avoiding the loyalty tax. And while you can refinance with your existing lender, it usually pays to shop around and compare home loan rates. That’s because Australia has a highly competitive home loan market, with many lenders fighting hard for your business.
The end of your fixed term is also a great time to reassess your home loan needs, as there’s a good chance your financial circumstances will have changed since you first took out the loan. As a result, you might want to consider switching to a mortgage that comes with features more suited to your needs.
For example, you might want to take advantage of an offset account or be able to make extra repayments without penalty.
Refixing your home loan with a new loan
Alternatively, you might want to lock in a little certainty and refix your home loan at an up-to-date rate.
The main advantage of refixing your home loan, aside from the certainty, is that you should be protected should interest rates continue to rise in the foreseeable future. On the flip side, you would miss out on any interest rate cuts too until your fixed term is over.
Finally, remember that fixed-rate mortgages aren’t typically as flexible as variable-rate deals. So refixing may not be your best option if you want to make extra repayments without penalty or use features such as an offset account or redraw facility.
Need help weighing up your options now that your fixed deal is expiring? The expert mortgage brokers at Shore Financial can help. Call us on 1300 416 700, email us on info@shorefinancial.come.au or fill in this online form to get started.
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