What happens at the end of your home loan’s fixed term?
If your mortgage is coming to the end of its fixed term, you have a few different options.
For borrowers on a fixed home loan, the end of your fixed rate period can be confusing and even a little daunting. However, this period provides borrowers with a great opportunity to review their home loan product and make the best decision with regards to their personal and financial circumstances.
In the months leading up to the fixed term's completion, do your research on the home loan market and ensure you have a good knowledge of your own mortgage to work out what options best for you.
What are your options at the end of a fixed rate period?
An easy way to break down your options is to consider the three R's: Refix, Refinance and Revert.
Refix your current home loan
When your fixed-rate term expires, you can choose to refix your home loan, provided your lender allows it.
Typically, the maximum amount of time you can fix for is five years. It's important to remember that fixing could see you potentially miss out on thousands of dollars saved, should variable interest rates drop during your term. However, if interest rates rise, you’ll be protected from increases until your fixed term is complete.
Fixing also probably isn't the best option if you plan to sell or renovate, or if you plan to make lots of extra repayments.
Refinance your mortgage
At the end of your fixed term, make a rate review request to your existing lender to ensure you have a competitive interest rate. You may be pleasantly surprised after speaking to your existing lender about the officers they can provide on your existing loan. If you find it's an average deal, you may want to refinance. There's a hugely competitive home loan market currently, so it's worth checking out and comparing home loan rates. If you refinance, you may be subject to discharge fees on your existing loan and application fees on your new loan, however, this upfront cost could save you thousands over the course of your loan.
Refinancing your home loan will also mean you'll get to choose between a fixed or variable loan. With a variable loan, you could be getting a more competitive interest rate and more flexibility with your mortgage, plus you can make extra repayments and pay off your loan quicker.
On the other hand you could fix your mortgage, but keep in mind the restrictions associated with this.
Another option is to refinance to a split loan, to take advantage of both products. One portion of your loan would be charged at a fixed rate, while the other is charged at the variable rate.
How you split the amount is completely your decision and this option affords you the security of a fixed loan while taking advantage of the features of a variable loan.
Revert to a variable interest rate
It pays to read the fine print of your home loan, as it will tell you how your interest rate will be handled, should you take no action at the end of your fixed term.
Typically, doing nothing will see your rate revert with no additional costs or paperwork. Your interest rate will usually revert to whatever the standard variable rate is that the lender offers.
It's for this reason you should consult your lender when this happens, as this standard rate can be considerably higher than the lower rates on the market. It’s also important to know that the variable interest rate can and will fluctuate depending on a number of factors, including the RBA cash rate and the lender’s financial situation.
If you found your fixed rate home loan was a bit restrictive, a variable interest rate will offer you the flexibility you’re looking for. Features such as offset sub-accounts, redraw facilities, and uncapped additional repayments are all at your disposal. However, if at any stage you’re looking to fix your mortgage again, there is little hassle in doing so i.e. no penalties.
Can I break the fixed term of my mortgage?
It's possible to break the fixed term of your mortgage but it can be expensive.
Ways in which its considered 'breaking' your fixed home loan include:
- Repaying the loan in full before the fixed-rate period ends
- Refinancing
- Making extra home loan repayments beyond which is acceptable in your fixed-rate period
Every lender will have different rules regarding the fees incurred when breaking the fixed-rate term.
Typically you'll be subject to two fees:
- Fixed rate break cost/break fee
- Fixed rate administration fee
The early repayment fee is the more expensive fee, costing potentially thousands of dollars while the discharge fee typically costs a couple of hundred dollars.
If you’re planning on breaking your fixed rate home loan, ask your lender to breakdown the costs involved, to help you consider whether it will be worth it.
What happens when interest rates have increased after the fixed period ends?
If interest rates have increased once your fixed period ends, the first thing you may want to do is conduct some research and find the most competitive interest rate on the market. You can also ask your lender to review your current interest rate on your loan and see if they can offer you a more competitive deal.
But remember, you don’t need to stay with your existing lender as other lenders may have better deals. Even an interest rate that is marginally lower could save you thousands of dollars in the long run. Doing your own due-diligence (research) will be your best friend in this scenario.
It may also help to ask potential lenders for a key fact sheet. The fact sheet will summarise the features of a standard home loan such as interest rates, the total cost of a loan, monthly and annual repayments, and how an interest rate increase will affect your repayments.
If your fixed rate is about to expire and you’re on the hunt for a new home loan, get in touch with the team at loans.com.au to help you get your finance sorted.
Find out in under 2 minutes if you qualify for one of our low rate home loans.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
