How to prepare for your fixed rate home loan to expire
Understandably, plenty of people made the most of the opportunity to lock in their mortgage rate.
The flow-on is that many homeowners who fixed part or all of their loan during 2020 or 2021 are in for a sharp increase in their repayments when their fixed rate expires. For instance, the difference in repayments between an interest rate of 2.00% and 5.00%, based on a $500,000 balance being paid off over 20 years, is $770 per month.
Still, with higher repayments on the horizon, are there any moves that homeowners in this position could, or should, be considering? Here are five options.
1. Re-work your budget
If your locked-in rate is due to expire this year, it’s imperative you book a time with your lender at least a month in advance to assess your financial situation and work out how much you will be paying when the fixed rate ends.
Now, the possibility of more interest rate hikes from the RBA may throw a spanner in the works in terms of working out exactly what interest rate the loan will revert to, but even a rough estimate can help when it comes to readjusting a budget to account for those higher repayments.
If you don’t currently have a budget and your rate is due to expire, it’s time to make one.
Look at where your money is going and see where you can cut back and once you’ve taken a look at your spending, it can be useful to group your regular income in accounts.
2. Negotiate a better rate
Not happy with the competitiveness of the interest rate you’re going to be paying when your fixed rate expires? There’s no harm in trying to negotiate a better deal with your existing lender.
Push hard and tell them that you’re going to leave. And even if it’s not the rate that you were hoping to get, remember that every little bit of money is going to help your back pocket, even if it’s a 10, 15 or 20 point reduction.
3. Think about refinancing
If negotiating a better deal with your existing lender doesn’t bear any fruit, it may be time to shop around with a view to refinancing.
Refinancing can potentially save you a lot of money over the life of your loan. There are an unprecedented amount of cash-back offers on the market right now with great rates attached so it really does pay to shop around when it comes to home loans.
If you find a home loan that you think could offer better value than your current one, whether due to a lower interest rate, lower fees, or access to more loan features – definitely consider it.
By starting your finance process three to four months prior to your fixed rate ending – if you believe that your property might go down in value in the following months – you’re giving yourself the best chance of getting the best valuation you can, as the value will be based on current comparable sales.
Evaluations with banks and most lenders will last 90 to 180 days which will allow you to get the best valuation that you can, and you don’t have to settle the very day that you return your mortgage documents – you can ask to settle on a date that coincides with your fixed rate term ending.
What you don’t want is to put yourself in a position where prices dip and then you don’t have enough equity to refinance.
4. Consider an offset account
While not unheard of, offset accounts aren’t commonly available with fixed rate home loans. But if you’re going to be moving onto a variable or a split rate once your fixed rate expires, they’re a feature worth enquiring about.
An offset account is a really valuable transaction account that is worth looking into if you don’t have one already. It’s linked to your standard variable rate home loan or investment home loan and money you put into your offset account reduces the balance on which the bank charges interest.
This means you’ll only be paying interest on the difference. For example, if you have $50,000 in your offset and your loan balance is $300,000, you’ll only pay interest on $250,000 of your loan balance.
5. Let us do the hard work for you
Dale from Account(able) Home Loans has been reviewing many of our existing client home loans.
All that is required is that you email Dale your current balance and interest rate. With this information he can then review your loan with your lender to ensure that the current interest rate is in line with the current markets.
So whether you are a client or not he may be able to secure a better deal for you.
Contact Dale Cameron on 0457 510 687 or via email dale@accountablefhl.com.au