Home Mortgage How homeowner dodged $24k ‘mortgage cliff’

How homeowner dodged $24k ‘mortgage cliff’

by Joshua Garcia

Canberra Homeowner Discovers Simple Solution to Mortgage Woes

A Canberra homeowner was facing a daunting prospect of having to pay an additional $2000 a month on his mortgage, but fortunately, he stumbled upon a simple solution. With the Reserve Bank raising interest rates consistently for the past 10 meetings, many mortgage holders who are coming off their fixed-rate terms are feeling the financial strain.

The homeowner, an ACT public servant, had locked in a fixed rate for two years during the height of the COVID-19 pandemic. Initially, he did not panic when interest rates started to creep up, as his fixed rate was still favorable. However, about four months before the end of his fixed rate period, he began to think seriously about the potential financial implications.

Concerns started to arise about how he and his partner would manage the increased rates once they were no longer on a fixed rate. Like thousands of other Australians in similar situations, he was facing what is commonly referred to as a “mortgage cliff.” Recent rapid interest rate rises have left fixed-rate borrowers facing significant increases in their repayments, putting them in a precarious financial position.

The Reserve Bank of Australia issued a warning earlier this year that around 800,000 home loans, amounting to $350 billion, were expected to switch from low fixed rates to market variable rates. This transition could be disastrous for many households that may struggle to service the new repayments, which could increase by over 50%.

Upon crunching the numbers, the homeowner realized that he would have to pay an additional $2000 per month, equivalent to $24,000 per year, once his fixed rate period ended. The prospect seemed overwhelming until his broker approached him proactively at the same time. The broker informed him about the impending changes and helped explore alternative options to soften the impact.

Matthew Hayes, Principal at Mortgage Choice Manuka, emphasized the importance of being proactive and preparing clients whose fixed-rate period is ending. Instead of solely focusing on interest rates, Hayes stressed the significance of assessing monthly net cash flow in the household and ensuring that repayments remain manageable. He explored strategies such as calculating monthly living costs and reviewing existing liabilities such as car loans and credit cards to minimize outgoing expenses.

This comprehensive approach helped the homeowner and his partner be as prepared as possible and provided them with more choices. The broker shopped around multiple banks and lenders to secure the most competitive rate. They eventually decided to switch banks, as a better rate was found elsewhere, allowing them to continue paying both the principal and interest.

By moving to a variable rate and consolidating other loans, the homeowner’s family is now saving $500 per month, or $6000 per year, compared to what they would have paid if they had stayed with their previous bank and switched to the new variable rate.

“We’re really pleased with the outcome,” the homeowner expressed his satisfaction with the solution and the financial relief it provided. This story serves as a reminder of the importance of staying informed and seeking professional advice to navigate the complexities of mortgage terms to secure the best possible outcome.

related posts