What should I do when my fixed rate ends?

Fixed interest terms on home loans don’t last forever, so it’s inevitable that you’ll have to decide what to do when yours ends. Do you want to opt for another fixed term? Switch to a variable interest rate? How about a split rate home loan?

If your fixed term is ending soon, now is the time to review your home loan, and look for a better deal. Here we’ll explain what options you have when your fixed term ends and how to find a new home loan that suits your needs.

Do I need to do anything when my mortgage fixed term ends?

If you don’t do anything nearing the end of your fixed term, your home loan will usually revert to your lender’s standard variable rate. Variable rates after the fixed rate ends tend to be much higher than usual. This is because lenders know that some people won’t be bothered to switch lenders at this point meaning that you end up paying a loyalty tax.

At this point you can sit on this rate for however long you like, but you may be able to get a more competitive interest rate if you look into your lender’s other options or refinance with a new bank.

Your lender will usually allow you to refix your home loan, but you want to make sure that you’ll be locking in a competitive interest rate. If you’d like some interest rate stability but don’t like the idea of locking yourself into a rate for years, you could pick a 1-2 year fixed rate or even consider a split loan.

Alternatively, finding a low variable interest rate could be beneficial. Variable rate mortgages come with a lot of flexible advantages, including loan features and unlimited extra repayments.

Can you extend a fixed rate mortgage?

You are unlikely to be able to extend a fixed rate mortgage at its current set interest rate. However, you can definitely fix your home loan again at an up-to-date rate. While it’s typical to have a fixed rate period of 1-5 years, some lenders offer terms of up to 10 years for those who just prefer to set their home loan rate and not worry about it.

The main risk of having a long fixed term is that you could miss out on interest rate cuts if the cash rate drops during your term. But, if interest rates rise, you’ll be protected from increases until your fixed term is over.

Another thing to remember is that fixing your interest rate isn’t a great idea if you plan to sell or renovate your home using equity from the property within the fixed period. Fixed rate mortgages also come with a lot of restrictions, meaning that you often can’t make unlimited extra repayments or utilise loan features like an offset account.

What is the penalty for breaking a fixed rate home loan?

If you don’t want to wait until your fixed term expires before you refinance or overpay on your home loan, you are likely to incur break costs. Break costs are charged by lenders when borrowers do something to ‘break’ their fixed rate loan terms, for example:

• Refinancing/switching to a new home loan or lender
• Paying off your home loan early
• Making extra repayments that exceed any caps set by your lender
• Selling your home during the fixed period (without loan portability)

Exactly how much you are charged will depend on your lender, loan amount and the state of the market. Typically break costs are calculated based on:

1. The amount of time left in the fixed term
2. The difference between the lender’s cost of funds now versus when the loan was initially settled

If you’re thinking about breaking your fixed rate home loan, speak to your lender about how much you could be charged in break fees to see if it will be worth it.

If you have a variable rate home loan, you won’t be charged break fees for doing these things. Try to plan ahead and think of what interest rate type would best suit your circumstances, or even consider a split rate mortgage.

Switching to a variable interest rate after your fixed term ends

After your fixed period ends, you should have a good idea of how fixed rate mortgages work and whether you would be happy proceeding with an additional fixed term. If you found your fixed rate home loan a bit constricting or you’d like to try something different, you could look into switching to a variable rate mortgage.

A variable rate mortgage will usually come with a lower interest rate, but this interest rate can and will fluctuate depending on the RBA cash rate and your lender’s financial situation. Some other features of a variable mortgage can include:

• Access to more loan features such as offset accounts, redraw facilities and loan portability
• Ability to make uncapped additional repayments
• When the cash rate drops, your interest rate will likely also decrease (and vice versa)
• Easier refinancing

Luckily, there are no penalties associated with refinancing from a variable rate. So, if you end up missing your fixed rate stability, you can switch back with little hassle. Alternatively, a split rate home loan is another option.

A split loan means that one portion of your loan balance has a fixed interest rate, while the other is on a variable interest rate. This way, you get the best of both worlds and the split doesn’t even have to be 50:50.

What if interest rates have gone up when my fixed period ends?

Generally there isn’t much you can do except find the most competitive interest rate that suits your needs. Since your fixed term is over, you can refinance with relative ease. Find out what rates your lender is offering to new customers and ask for this lower rate.

However, you don’t need to limit yourself to your existing lender — other lenders may have better deals. Even a marginally lower interest rate could save you thousands of dollars over time, so don’t underestimate the importance of searching for a good deal. In saying this, consider the whole loan product and associated fees and charges rather than just the interest rate.

If you aren’t sure how to proceed after your fixed period ends, it might be a good idea to chat with a mortgage broker to discuss your options.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.