Why Consider Switching from Variable to Fixed Rate?
If you're currently on a variable interest rate, you're probably familiar with the anxiety that comes when the Reserve Bank announces another rate decision. Your mortgage repayments can shift up or down, making it challenging to plan your monthly budget with confidence.
Switching from a variable to fixed interest rate through refinancing gives you certainty. You'll lock in your rate for a set period, typically between one to five years, which means your repayments stay the same regardless of what happens in the broader market. This predictability can help you manage your household finances more effectively and sleep a little easier at night.
When Does It Make Sense to Refinance to Fixed?
Not everyone needs to refinance to a fixed rate, but there are specific situations where it makes solid sense:
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You're stuck on a high rate: If your current variable interest rate is significantly higher than what's available in the market, you might be paying too much interest each month. A home loan refinance could potentially access a lower rate and save you thousands over the life of your loan.
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You need budget certainty: If you're planning major life changes like starting a family, changing careers, or making other significant financial commitments, knowing exactly what your mortgage repayments will be can reduce financial pressure.
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You expect rates to rise: While no one has a crystal ball, if you believe interest rates are heading upward, locking in a fixed rate now could protect you from future increases.
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Your fixed rate period is ending: If you're coming off a fixed rate and moving to a variable rate, this is the perfect time to review your options. Don't just roll onto your lender's standard variable rate without doing a comparison.
Understanding the Refinance Process
The refinance application doesn't need to be overwhelming. Here's what typically happens when you decide to move from variable to fixed:
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Home loan health check: Your mortgage broker will review your current loan amount, interest rate, and loan features to understand what you have now.
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Property valuation: Lenders will assess your property's current value to determine your loan-to-value ratio (LVR).
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Compare refinance rates: You'll look at current refinance rates from multiple lenders to find which fixed rate option suits your situation.
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Application submission: Once you've chosen a lender, your broker handles the paperwork and submits your refinance mortgage application.
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Settlement: After approval, the new lender pays out your old loan, and you start making repayments at your new fixed interest rate.
The entire refinance process typically takes between four to six weeks, depending on the lender and your individual circumstances.
What to Watch Out For
Before you switch to fixed, there are a few things worth considering:
Break costs on your current loan: If you're currently on a fixed rate that hasn't expired yet, you might face break fees. However, if you're on a variable rate, there are usually no significant penalties for refinancing.
Reduced flexibility: Fixed rate loans often have restrictions on extra repayments. Many lenders cap additional repayments at around $10,000 to $30,000 per year during the fixed rate period. If you're planning to make substantial extra repayments, this could limit your options.
Feature limitations: Variable loans typically offer more features like unlimited redraw facilities and offset accounts. While some lenders do offer a refinance offset account with fixed rates, the functionality might be more limited than what you're used to.
The length of your fixed period: Consider how long you want to lock in your rate. A shorter fixed rate period (one to three years) usually comes with lower rates but less long-term certainty. A longer fixed period (four to five years) provides extended protection but might have slightly higher rates.
Beyond Just the Rate
While switching from variable to fixed is often about securing a particular interest rate, refinancing can achieve other goals at the same time:
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Access equity for investment: If you've built up equity in your property, you could release equity to buy another property or make other investments.
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Consolidate debt into your mortgage: Move higher-interest debts like credit cards or personal loans into your home loan to reduce your overall interest costs and improve your cashflow.
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Upgrade your loan features: Even when moving to fixed, you can still secure better features than your current loan offers, whether that's a partial offset facility or more flexible repayment options.
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Adjust your loan amount: If you need funds for renovations or other purposes, a cash out refinance lets you increase your loan while securing a fixed rate.
How Much Could You Save?
The amount you could save by refinancing depends on several factors, including the difference between your current rate and the new rate, your loan amount, and how long you plan to stay in the property.
For example, on a $500,000 loan, even a 0.5% reduction in your interest rate could save you around $2,500 per year in interest payments. Over a five-year fixed rate period, that's more than $12,000 back in your pocket.
It's worth conducting a loan health check regularly to ensure you're not missing out on potential savings or improved loan features.
Getting Started with Your Refinance
If you're considering a switch from variable to fixed rate, the first step is understanding what's available and how different options align with your financial goals. A home loan refinance isn't just about chasing the lowest rate - it's about finding the right structure that works for your circumstances.
Think about:
- How long you plan to stay in your property
- Whether you'll need to make extra repayments
- If you need to access equity in your property
- What loan features matter most to you
- Your overall financial goals for the next few years
Once you're clear on your priorities, comparing your options becomes much more straightforward. The mortgage refinancing market offers diverse products, and what works for your neighbour might not be right for you.
Whether you're coming off a fixed rate and want to lock in again, or you're tired of variable rate uncertainty, switching from variable to fixed through refinancing could provide the stability and potential savings you're looking for. The key is doing your research and getting professional advice tailored to your situation.
Ready to explore your options? Call one of our team or book an appointment at a time that works for you. We'll review your current home loan, explain your refinancing options, and help you decide whether switching to a fixed rate makes sense for your financial future.
