Concerned about your mortgage payments when your existing Fixed Rate expires?

Recently we’ve had many clients in situations where they have been asking whether or not they should break and re-fix their existing fixed rates. Generally speaking for those clients with quite a long fixed-rate period left, in many cases it doesn’t make sense. 

However, for others who have fixed rate expiry dates within the next 12-18 months, this is more of a difficult decision, so I thought it might be worthwhile to share a couple of points that could be worthwhile in your own situation if you decide not to break and re-fix just yet:

1. Figure out what your payments would be at a higher rate and see if you are comfortable with those payments. You could do this by finding out the remaining loan term of your mortgage once the fixed rate expires, and then looking at what the higher repayments would be on that remaining term with a higher rate (e.g. 6%). A link to our calculator for this is here.
2. Following this you have a couple of main options:
   1. If you are certain of your future cashflows and are comfortable with the above repayments, what you could look to do is take the difference between your current payment and this figure, and use it to further reduce your debt (i.e. voluntarily go onto this payment now). There are different ways of doing this depending on your bank and current fixed rate situation, but in general, if paying above the minimum this goes directly towards reducing the principal of your loan.
   2. If you are a bit uncertain of your future cashflows then again figure out what the difference in payment is, and put the difference aside in a separate account (or revolving credit or offset account). This will get you used to a higher payment, but also means that when your fixed rate expires and you are on a higher fixed rate in the future if the payment is sometimes slightly outside of your budget at the time, you will have surplus funds leftover in a separate account to help you manage these payments through the period of higher interest costs.

For example, if you’ve got a $750,000 mortgage that you took out in March 31 2021 fixed at 2.49% for 2 years until March 31 2023, your payments would be $2,960 p/m until the rate expires (over 30 years). At the end of the 2-year period, if you had a 6% interest rate for the remaining 28 years, your payments would jump to $4,497 p/m. The difference here is $1,537 p/m. For option 2a above this would mean you’d work on paying extra payments on your principal as soon as possible. For option 2b above, you would save this amount in a separate account which would mean you’d end up with around $12k surplus in an account that you can call on once your rate changes.

As always what I’ve said above is more generic in nature and not to be taken as financial advice. For a more in-depth review of your own financial situation, please feel free to get in touch.