Homeowners locked into low fixed rates will face a shock repayments increase once their term expires.
RateCity.com.au published a report recently showing many mortgage holders may face more than double rates increase once their fixed terms end.
The loan comparison site claims that around 38% of mortgages are currently on fixed rates, with most holders ending their contracts around mid-to-late 2023, with most of them seeing increases of up to 45%.
According to the Australian Bureau of Statistics (ABS), fixed mortgages peaked in popularity in July when 46% of new home loans were fixed.
If you took out a $500,000 mortgage on fixed terms in that month from a bank with a 2-year rate at 1.94%, you might be paying around $2,100 in repayments.
If your fixed rate agreement ends next year, you might need to take the pinch from a revert rate of 5.68% with your repayments rising to more than $3,042, which is an increase of $937 per month.
Even if you renegotiate your mortgage, your nre monthly payments may still be higher by $600 to $700.
One way to manage the sudden increase is to refinance your mortgage, and here are some pointers to help you:
Refinancing your fixed rate mortgage loan
Changing your mortgage provider is possible but your current lender may ask for compensation because technically you are breaking your contract, assuming that you want to refinance while still within the fixed-term period.
The compensation can be quite expensive because you may need to pay a discharge fee and a break fee.
You may switch to a new lender without the need to pay break fees as long as you pass your new bank’s serviceability tests.
Another option is to wait for your fixed term agreement to expire before you apply for refinancing.
Banks offering mortgage refinancing
For a $500,000 mortgage loan in New South Wales, the following banks are offering mortgage refinancing with interest rates a bit lower than the expected 5.68% increase after a 2-year fixed mortgage:
- Hume Bank 5.05%
- imb Bank 4.49%
- Qudos Bank 4.99%
- BCU 4.64%
- Unity Bank 5.19%
- Bank of China 5.29%
- CBA 5.29%
- tic:toc 4.90%
- Bank First: 4.79%
- ubank: 5.19%
- ANZ 5.19%
- St. George 4.89%
Source: CanStar Jun 16, 2022
What to watch out for:
There are certain red flags that a new lender or even the idea of refinancing may not be your best choice. Here are a few to look out for:
Mortgage brokers
While you can apply for mortgage refinancing on your own, you can save a lot of time and energy if you enlist the help of a broker.
But make sure you choose a broker that can provide you with independent advice. Usually, you don’t have to pay for a broker because they make money through upfront and trailing commissions from lenders.
This scenario demonstrates a conflict of interest, because the broker may not be looking for your interest and instead could be after their commission.
Much lower rate compared to other lenders
It’s normal for different lenders to offer lower rates than your current lender. But if your potential lender is offering a rate that is significantly lower than the rest, then it might be too good to be true. It could be that the new loan offer will have higher closing costs or ongoing fees. Let’s say you received three offers ranging from 3.85% to 3.95%. Then a fourth lender offers 3.2%, don’t jump in too fast. Instead, take a look at the whole terms and read the fine print before you sign up.
Guarantee of fast closing
It typically takes lenders at least a month to process a mortgage refinance. Remember, there are many steps that you need to take to close a mortgage, including underwriting mortgage appraisal, and more. While it is possible to close a loan in less than 30 day, it is very rare. And it will usually take 45 to 60 days for a mortgage to close. If your new lender promises to refinance your mortgage in 10 days then you need to dig deeper.
Cancellation fees
Be sure to check if your potential lender charges cancellation fees. Some lenders may place a caveat on your property, which practically holds on to your asset until you pay the cancellation costs.