Fixed mortgage coming to an end? Know your options January 16th, 2023
With the Christmas decorations now packed away and 2023 Near Years Eve almost a forgotten memory, you or one of your loved ones might be staring into 2023, wondering what to do with a fixed-rate mortgage about to mature.
According to online research house Canstar.com.au, nearly 40 percent of all mortgages in place at the moment are fixed rate with about half of these expected to mature or roll-over sometime this year.
The deal you can negotiate, will depend on how long you’ve been paying your existing mortgage.
If you fixed your mortgage in the last 2 to 3 years, you will probably find the variable rate offered when the loan matures with your current lender is much higher than if you were coming in as a new borrower. Sometimes by as much as 0.5 percent extra.
You should always talk to your existing lender. But with lenders chasing new business, it is worth shopping around.
The best deals are available to those with a higher level of equity in the property, typically where the loan is less than 80 percent of the current value.
For example, if your mortgage is currently $300,000 and your home is worth $500,000 you are looking at a figure of 60 percent and are likely to be attractive to a new lender.
In the game, it’s referred to as the Loan to Valuation Ratio or LVR. If your LVR is 80 percent or more, you probably won’t get a great deal.
Loans exceeding this level of equity are likely to incur a new Lenders Mortgage Insurance (or LMI) policy which protects the lender if you default on your loan.
LMI does not carry across from one lender to the next. The bigger the gap in equity to hit the magic 20 percent figure, the higher the premium.
If your house has dropped in value since you bought it, you might find that your equity in your home has dropped. This would mean that the new LMI premium could actually be higher, wiping out any savings on interest.
That’s because the LMI premium is paid in full up-front, and is typically just added to the loan.
For this reason, the LMI cost of a new loan requiring insurance might wipe-out the viability of changing lenders.
The key is to save as much as you can to reduce the total amount you need to refinance and make sure you can afford the extra repayments when they come.
At this stage, expect to pay somewhere between 5.5 percent and 6 percent when you come off your fixed mortgage later in the year.