The fixed-rate cliff is upon many borrowers this year, leaving them no choice but to refinance or be stuck in a mortgage prison — how can they navigate these challenging times?
According to Rate Money, around $141bn worth of fixed-rate home loans are expected to expire in the coming months.
Rate Money CEO Ryan Gair said the Australian Prudential Regulation Authority (APRA) should have separate recommendations to regulate existing borrowers.
“They should allow those looking to refinance to simply show that they can meet the repayments along the same lines as applying for a new loan, and that your current income can still service the repayments,” he said.
Currently, all borrowers, including refinancers, are being assessed using the 3% mortgage serviceability buffer that APRA still deemed appropriate despite the successive rate hikes.
Mr Gair said the higher rates and the recent downturn in property prices are the two factors driving the concerns among borrowers who are planning to refinance once their fixed-rate term ends.
“Fortunately, there are solutions for borrowers coming off fixed-rate loans who will likely see their repayments double and for those stuck in a mortgage prison,” he said.
“While times are tough and interest rates continue to rise, consumers should do everything in their power to stay afloat and put themselves in a better financial position in the long run.”
Here are some of the tips Mr Gair has for those stuck in mortgage prison and are preparing for the expiry of their fixed-rate loans:
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1. Have the property revalued.
The recent downswing in the market might have already affected the value of property values.
Mr Gair said borrowers must consider getting their lenders revalue their property now instead of waiting until their fixed rate ends.
“Banks assess the value of your home on current comparable sales,” he said.
“This means you don’t even have to settle the day you return your paperwork — most lender evaluations last between 90-180 days so you can coincide it with your fixed-rate term ending.”
Mr Gair said doing this could be the difference between having enough equity to refinance.
2. Consolidate debts and get an interest-only loan.
The increasing costs of living and the rising interest rates are making it challenging for borrowers to manage their existing debts like tax debts, car loans, and credit card balances.
Mr Gair said consolidating all debts to the home loan and getting an interest-only period will be a practical solution for the immediate term.
“While interest rates are high, this could be a great way to reduce your monthly repayments over the next two or so years,” he said.
“It will free up cash flow and help your financial positioning, while alleviating stress.”
3. Negotiate for a better rate.
Borrowers who may be trapped due to property declines that eroded their equity must reach out to their lender and negotiate for a better rate.
“Research the current interest rates available in the market and call your bank to negotiate a better deal in line with this,” he said.
“Banks are looking to hold onto customers for as long as possible, so the majority will give you a better rate for your loyalty.”
4. Look beyond mainstream lenders.
Mr Gair said there is perception that the most established and well-known banks and lenders offer the best deal, but this is not necessarily the case.
“I encourage borrowers to look at alternative lenders like those outside of the Big 4 and even non-banks, too,” he said.
“A different lender might be able to help you find a better solution for your circumstances and approve your loan.”
5. Avoid fishing expedition.
One thing borrowers must avoid when they are trying to refinance is submitting multiple applications at the same time.
Mr Gair said doing so will negatively affect credit rating, as it will create multiple queries that tend to reduce mortgage scores.
“Banks can see that you’ve gone to two or three lenders and will consider this a red flag — a lower mortgage score will also make it harder to get approved,” he said.
Photo by Bill Oxford on Canva.