Five things to consider before locking in a new mortgage interest rate

Before locking in a new rate, borrowers can consider their plans and goals, compare rates across lenders and structure their mortgage according to their needs.
Before locking in a new rate, borrowers can consider their plans and goals, compare rates across lenders and structure their mortgage according to their needs. Photo credit: Getty Images.

Interest rates are on the rise, requiring mortgage borrowers coming off lower fixed rates to incorporate higher repayments into their budget.  

The official cash rate increased by 25 basis points, to 1 percent on Wednesday. The path for interest rates is now higher, Reserve Bank forecasts showing further cash rate increases in 2023 and 2024, taking it above 3 percent.

Although mortgage interest rates are currently still at historically low levels, they've moved off the sub 3 percent lows of 2020 and 2021, when one-year fixed rates were as low as 2.25 percent. Borrowers rolling off one and two-year fixed-rate mortgages now are having to refix at rates between 4 and 5 percent.

To help borrowers navigate the different options, Newshub asked Rachael Thompson at The Smarter Mortgage Lady five things to consider before locking in a new mortgage rate.

Independent economist Tony Alexander explains why the two-year fixed rate has been an increasingly popular option for borrowers, based on results from the February Mortgage Advisers Survey.

1. Check the existing fixed rate expiry date

As a first step, it's helpful for borrowers to know what their existing fixed interest rate is, and the date it expires.  

This information can usually be found by logging onto online banking, and/or by calling their lender or mortgage adviser.

Borrowers are usually notified six to eight weeks before their loan expires, either by their bank/lender, or mortgage adviser.

"Borrowers can lock in a rate before their existing rate expires within the timeframe of the lender," Thompson says.

In a rising interest rate environment, locking in a rate earlier can save money.

If a new rate isn't locked in before the fixed rate expires, in most cases, the mortgage will move onto a floating ('variable') rate.

2. Consider plans and goals 

To help borrowers decide which fixed rate option is best, Thompson suggests they have a discussion about their plans and goals.

"It's important not to rush in…think about changes in your family, are you planning a baby, are you looking to sell, buy an investment property - or renting it out and going overseas?" Thompson says.

For example, if there are plans to sell, a variable rate, or short-term fixed rate may be the best option. Those planning to stay in their home indefinately may want the certainty of a longer-term fixed rate.

"If your existing mortgage doesn't suit your plans and your lifestyle, it's important to review and restructure it to make it smarter."

3. Weigh up different rate options

A fixed mortgage rate stays the same for a specified term (e.g. six months to seven years).

Floating mortgage rates are flexible. Borrowers can pay off as much as they like, without paying a 'break fee'. 

"Having those fixed terms gives you certainty of cost, whereas a floating loan can go up and down," Thompson explains.

In a February Mortgage Advisers Survey, two and three-year fixed rates were cited by mortgage advisers as a "strong preference" for borrowers.

On Wednesday, two-year fixed mortgage rates across the five main banks start from 4.35 percent, three-year fixed rates from 4.64 percent.

Tony Alexander said people had recently gravitated towards fixing for two years. This is likely to be because fixing for two years is currently cheaper than fixing for three years or more.   

"With the cost of living generally rising for people, they're looking for cost savings - or at least to minimise their cost increases," Alexander says.

As the cash rate rises, one and two-year fixed rates could increase by more than longer-term rates, making it important for borrowers to check rates before they refix.

4. Check rates across other lenders

Rather than locking in a new rate straight away, Thompson suggests checking the rates offered by other lenders, for the fixed term required.

There may be an opportunity to negotiate the rate, reducing repayments.

"Borrowers working direct with their bank could do their own market research, look on and [see] what other banks are offering," Thompson says.

Before moving to a lender for a low rate, she suggests checking if there are incentives for new borrowers, and whether they provide advice.

5. Revise mortgage structure if needed

Borrowers coming off a fixed rate have the opportunity to structure their mortgage to suit their needs.

Rather than fixing at the lowest rate, Thompson urges borrowers wanting some certainty over their repayments to 'spread their risk'.

She suggests borrowers split the mortgage into at least two, and fixing for two different terms. This avoids being hit with an increase all at once, when a fixed rate expires.

"Spreading your risk means having your loan broken up into pieces and having it fixed across different terms, so you can ride the waves of the highs and the lows," Thompson says.

Borrowers could also structure their loan to allow voluntary payments to be made, reducing the interest paid on the loan.

As everyone's situation is different, borrowers are advised to get advice, talking to their bank, or a mortgage adviser.