When you fix your home loan, you enter into a contract agreement where your interest rates and repayments are locked in for a certain amount of time.
If you decide on a fixed rate loan, is it possible to refinance? And if you can, would you be better off breaking your loan, or waiting for your fixed rate term to end? In this current market, should you look for a new variable home loan instead?
What is a fixed rate loan?
A fixed rate home loan is a loan in which your interest rates and repayments are locked for a certain period of time, usually on a loan term of 1-5 years. This means that your interest and repayment amount stays the same for the duration of the fixed loan.
The alternative to a fixed rate loan is a variable loan which is when your interest rates can be changed in line with the market conditions and cash rate set by the RBA (Reserve Bank of Australia). Your interest rate, and choosing whether you want a fixed or variable rate home loan is important as it determines the size of your repayments and the total loan amount you will pay.
At Homestar Finance, we offer both fixed rate loans and variable rate home loans, and it is your choice as to which best suits your financial situation. If you need assistance in choosing what home loan is best for you, speak with our loan specialists.
Can you refinance a fixed rate home loan?
The question of whether or not you can refinance a fixed loan can be simply answered with: yes, you can. However, there are a few things to consider before taking the leap to refinancing your home loan, specifically when it comes to a fixed rate loan.
For fixed rate home loans, you must enter into a contract agreeing to a certain time period of locked interest rates. If you wish to refinance this kind of loan before the loan term is finished, you must break your contract agreement. If you do break your contract agreement, you will have to pay your lender the appropriate compensation.
Compensation for breaking a fixed loan contract agreement usually includes paying two different fees: a discharge fee and a break fee. It is important to account for these costs when refinancing as while it is possible to refinance your fixed rate home loan, it does not necessarily mean you always should.
If you decide against refinancing, you might want to wait for your fixed rate period to end.
What to do if your fixed rate period is ending?
If your fixed rate period is ending, you might be wondering whether you should retain your existing loan, refinance before the fixed rate period ends, refinance after your fixed rate term ends, or better still get ready to refinance as soon as your fixed rate end.
Often, refinancing as your fixed rate term ends is the right decision, as your loan may roll over to a high variable interest rate home loan – by ensuring you are prepared and refinancing as your fixed rate term ends, you’ll be able to ensure you are continuing to benefit from a competitive rate.
Ensuring you are prepared ahead of time for when your fixed rate period ends is critical to ensure you are not overpaying on your mortgage. Get in touch with our home loan specialists to find out more about your options.
Should I break my fixed rate mortgage?
Breaking a fixed rate mortgage is a big decision. It comes down to whether the savings are higher than the costs to break your mortgage. If the amount of money you may save by refinancing is not higher than the cost to break your fixed term, sticking with your original agreement may be the best option for you.
The refinancing process extends beyond exiting your old loan, so you need to be prepared for the next part of your home loan journey. Beyond the costs, you will need to also consider the process of finding a new loan that suits you, your finances, the current property market, as well as your preferred fixed terms and repayment schedules.
Our ‘How To’ guide to refinancing is available to explain the steps you will need to take after breaking your fixed mortgage.
If you decide against breaking your fixed rate loan, you’ll be able to avoid break costs – if this is the case, be prepared to move once your fixed rate term ends.
Advantages of refinancing a fixed rate loan
There are many advantages to refinancing a fixed rate home loan, but it is always dependent on your current financial situation and what kind of home loan you require. While a fixed rate loan is great for having a cashflow certainty and to lock in a lower interest rate, there are many reasons to refinance such as:
Getting a better interest rate
Your fixed rate home loan means that your interest rates are ‘locked in’ or inflexible to the RBA market conditions. Therefore, if a better deal or lower interest rate is available, refinancing may be the best option for you to take advantage of it and hopefully receive a reduction on the rate you’ve fixed.
More flexibility
Fixed rate home loans often have limitations on how many extra repayments you can make, and typically don’t have a redraw facility. If you wish to pay off your loan sooner and have the capacity to do so, refinancing may be the best option.
Your financial circumstances have changed
Of course, there are always fluctuations in personal situations- new jobs, additional household members, marriage- and taking those into account with your financing is always important. Refinancing your fixed rate home loan may be the best option if you’ve had a recent personal change.
Disadvantages of refinancing a fixed rate loan
Refinancing is a big decision in any mortgage agreement, however refinancing a fixed rate mortgage and having to break your contract can be even bigger. There can be significant disadvantages to refinancing a fixed rate loan, the main two being costs and losing your fixed interest rate.
Cost
The cost of breaking your contract agreement can become quite expensive. Your discharge fees can cost a couple of hundreds of dollars. Your break fee, on the other hand, is usually a significant amount and is based on several factors of the loan you wish to refinance. The break fee is considered to be the financial loss incurred by the lenders.
Unfortunately, it is almost impossible to refinance a fixed rate loan without incurring these costs if you are doing so before the end of the fixed term. Unless you urgently need to change loans, it may be best to wait out your current loan term before deciding on a new mortgage.
Losing your fixed interest rate
Losing your fixed interest rate may be something that you aim to achieve when refinancing a fixed rate mortgage, however it is important to consider the consequences. If you do decide to refinance a fixed rate loan, your current fixed interest rate will not be continued throughout the rest of your loan term.
Break costs
One of the first things to consider before breaking your fixed rate agreement, and choosing to refinance is how much you will have to pay in compensation. Compensation usually includes both a discharge fee and a break fee or break cost.
What are break costs?
The break costs or break fees are the costs your lender will charge you as a compensation to the losses they incur when you break your fixed rate loan agreement. Calculating break costs is done by the lender and is based on the components of the loan agreement you are wanting to ‘break’ early.
How are break costs calculated?
The formula that break fees are calculated with may differ among different lenders, however they are all based on three main factors:
- The market interest rate when you originally agreed to your fixed rate in comparison to the current market interest rate.
- The period of time remaining in your loan term.
- The amount of money or loan amount you initially borrowed.
The general rule that can be followed is that the more interest rates have dropped since you first entered your fixed rate agreement, the higher or more costly your break fee will be.
When are break costs incurred?
Break costs are only incurred if you choose to break your home loan agreement before the loan term is up. For example, if your fixed rate term period is set at 3 years and you finish that period of time and then choose to refinance, you should not incur break costs.
If you are determined to refinance to a new home loan during your current fixed rate period, it is integral to prepare yourself and your savings ahead of time. Calculate the total costs of your break and discharge fee, as well as the costs involved with refinancing to a new home loan. This way, you can begin setting aside savings to cover these fees as soon as possible, leaving you organised and ready to take on the refinancing process.
How do you avoid break costs on a fixed loan?
The best way to avoid break fees on a fixed loan is of course by not breaking your loan agreement earlier than the loan term. You may incur lower break costs if you apply the general rule- high current interest rates equals lower break fees (and vice versa)- and refinance at a time where the current interest rates are indeed higher than when you first entered your fixed rate period. Otherwise, wait until your fixed rate period ends, and ensure you are prepared for when this happens.
Should I refinance my fixed rate loan?
Refinancing a fixed rate loan should be a well-thought out and considered decision. You should take into account all possibilities, including the expense of compensation you will have to pay your lender. While the most popular reason to refinance a home loan is to get a better interest rate, it may not be the best option for every financial circumstance.
Before you take the leap to refinance, it is best to consider how much you will actually save from refinancing, as well as how much it will cost to break your fixed term agreement. If the expense to break is greater than how much you might save, it may be best to keep with your original loan agreement.
What if I am making interest only payments?
Making interest only payments on your fixed rate home loan means that if you choose to refinance and break your loan agreement, you will lose your current fixed interest rate. In addition, refinancing may mean that an interest-only payment scheme may not be the best option for you.
Take a look at our refinance calculator for a better understanding of how refinancing may affect your financial situation.
Should I break my fixed rate mortgage?
Breaking a fixed rate mortgage is a big decision. It comes down to whether the savings are higher than the costs to break your mortgage. If the amount of money you may save by refinancing is not higher than the cost to break your fixed term, sticking with your original agreement may be the best option for you.
Should I break my fixed term early to re-fix my rate?
Re-fixing your rate by breaking your original fixed home loan agreement is a tricky business. Taking into account your compensation costs (discharge and break fees) is integral to whether or not you will actually save money in the long run.
Although you may wish to break your fixed term early for a lower interest rate, if the interest rate is lower than your original fixed interest rate, your break fees may end up being more expensive than it’s worth. In the case of re-fixing your rate, it is always advised to seek professional advice from one of our loan specialists.
Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.
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