How rising interest rates could affect fixed-rate mortgage holders

Borrowers who locked in record-low fixed interest rates below 2 per cent in the past few years are likely to face a substantial increase in mortgage repayments when their fixed terms end and they roll onto their lender’s standard variable rate. 

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The big banks now predict the official interest rate to rise by between 1 and 2 percentage points within the next two years, which could push typical variable rates to between 4 and 5 per cent.

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While many borrowers with fixed-rate loans still have time to enjoy low and steady repayments, preparing for rising rates now could put them in a better position when their fixed terms end.

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How are fixed-rate mortgage holders affected by rising interest rates?

Fixed-rate mortgage holders may be insulated from initial increases in the cash rate, but they won’t remain unaffected forever, said ANZ senior economist Felicity Emmett. 

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“In 2020 we could get rates for either a three-year mortgage or two-year mortgage for below 2 per cent,” she said. “Over the next couple of years, we’re going to see a number of people coming off those fixed mortgage rates as their term expires and roll onto variable mortgage rates, and those rates will be significantly higher.” 

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Due to the extraordinary measures the RBA took during the pandemic to help reduce borrowing costs, an unusually high share of borrowers are now on fixed-rate mortgages, Emmett said. 

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“If we look back to 2019, it was around 15 per cent of people taking on these [fixed] rates,” she said. “But, through 2020 and into 2021, we saw that really ramped up quite a bit, with the peak of about 46 per cent of people taking on fixed-rate loans in the middle of 2021.”

As a result, many home owners could experience a significant increase in their repayments over the coming months and years.  

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