The move that could save fixed rate borrowers tens of thousands of dollars

The peak of the 'mortgage cliff' has arrived, according to the Commonwealth Bank, with the bulk of pandemic-era fixed rate home loans set to expire between June and December 2023.

Many of these home loans were locked in with a mortgage rate of less than 2% and borrowers now face a steep increase in interest repayments when they reach the end of their fixed term.

But while higher repayments will ultimately be unavoidable, Mortgage Choice broker Paul Williams said the cost will be greater for those who are complacent.

“People coming off a fixed rate are usually offered a standard variable revert rate by their lender, or the choice of fixing again” Mr Williams said.

“It is quite costly for people to revert automatically onto a standard revert rate.”

That’s because the standard variable rate is generally much higher than the discounted rate offered to new customers, he said.

“As brokers, we seek a discounted rate,” Mr Williams said. “Usually they'll come to the party.”

The cost of being complacent when your fixed term ends can add up to tens of thousands of dollars over a year. Picture: Getty

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“The way in which we do that is to quote a competitor rate, and or, talk to that particular bank’s retention team where the best discounts can be obtained from.

“Sometimes we've had to send back rate requests at the expiration of a fixed period three times.”

The good news is that lenders have been ramping up efforts to retain customers in recent weeks, with many offering more competitive rates to existing borrowers rather than new customers only.

Cost of being complacent

A borrower who locked in a two-year fixed rate of 1.99% with one of the big four banks in October 2021 could see their monthly mortgage repayments more than double if they roll onto their lender’s standard variable rate at the end of their fixed term.

Analysis conducted by realestate.com.au shows that could run into the tens of thousands of dollars over one year.  

For example, a borrower who took out a $500,000 home loan with CBA in October 2021, on a 1.99% two-year fixed rate, could see their repayments jump by $2,017 a month – or more than $24,000 a year – if they rolled onto the bank’s standard variable revert rate of 8.55%.

By comparison, if they refinanced to CBA’s lowest basic variable rate of 6.44%, repayments would jump by $1,295 a month, or $15,540 a year – nearly $10,000 less.

$500,000 mortgage:

Mr Williams said the savings could be even greater if that borrower refinanced to the lowest variable home loan rate on the market.

“The difference between Big Four bank and second tier lender variable rates or revert rates is also considerably different,” Mr Williams said. “So it’s well worth shopping around.”

By switching to a basic variable rate of 5.79% with a different lender, that same borrower would see their mortgage repayments increase by $13,019 over a year - still a big hit, but substantially less than the $24,200 they'd be paying on the standard variable rate.

For a $750,000 the difference between CBA's standard variable rate and the lowest basic variable rate of 5.79% adds up to more than $18,000 over a 12 month period, and a whopping $24,000 for a $1 million home loan.

$750,000 mortgage:

$1 million mortgage:

Mr Williams said lender rates can vary depending on how 'secure' customers are perceived to be, and getting a fresh property valuation could result in a lower rate.

“Lenders typically price their mortgages based on loan to value ratios, amongst other things,” he said.

“Those sorts of strategies that can help people understand how they can reduce the level of repayments on their home loan and reduce the amount of interest they pay.”

Eyes on RBA next week

The Reserve Bank of Australia is widely expected to keep the cash rate on hold at 4.1% when it meets in October, however economists are not ruling out one more rate hike before the end of the year.

Monthly inflation data this week showed the consumer price index rose back above 5% in the 12 months to August, up from 4.9% in July.

While the lift was largely due to volatile fuel prices, there are concerns that the price of essential items and services - such as insurance and rents - will remain stubbornly high.

But borrowers are expected to see some mortgage relief next year, with economists forecasting cuts in 2024, although predictions on exactly when the first rate cut will come varies widely.

On Tuesday, new RBA governor Michele Bullock will deliver her first interest rate decision since taking over from Philip Lowe.

Originally published at: https://www.realestate.com.au/news/the-move-that-could-save-fixed-rate-borrowers-tens-of-thousands-of-dollars/