My fixed rate is expiring – what
should I do?

As your fixed rate period comes to an end, it’s smart to be prepared and know what your next steps are.

The end of a fixed rate loan presents a good opportunity to review the terms of your existing loan. If a lot of time has passed since you last refinanced, your loan may not suit your current needs.

It may be a good time to assess what these needs are and what type of home loan is right for you.

In this article we’ll explain what happens when your fixed rate ends, what your next options are, when to consider a variable rate versus a fixed one and more.

What happens to your home loan when your fixed rate ends?

Most fixed rate mortgages in Australia have a fixed period of 1-5 years, so you have some decisions to make after this period ends.

If you just let your fixed rate home loan expire, the interest rate will likely just revert to your lender’s standard variable rate.

So, in theory you can just let your rate expire and not do anything. However, if you just accept your lender’s standard variable interest rate, you may find yourself paying an uncompetitive rate.

Some lenders take advantage of the fact that many borrowers forget or opt not to sort out their home loan once their fixed period ends. The interest rate you get may be subpar, resulting in you effectively paying a loyalty tax.

Loyalty tax is when lenders charge their new customers lower interest rates, while charging existing (‘loyal’) customers higher rates.

Leading up to the end of your fixed term, it’s worth reviewing your home loan options.

What are my options when my fixed rate mortgage ends?

Other than letting your fixed rate mortgage transition into a standard variable rate mortgage, you have a few options:

1. Secure a new fixed rate mortgage: if you prefer a fixed rate home loan, you can organise a new loan with your current lender or a new lender. Make sure you are locking in a competitive fixed rate by researching and comparing other fixed interest rates on offer. With interest rates likely to rise in the next couple of years, locking in a low interest rate could be a good move
   
   
2. Switch to a different variable rate home loan with your current lender: the standard variable rate is probably a ‘no-frills’ option and if you want something better, your lender may have some other options
   
   
3. Switch to a new lender: if you can’t find what you’re looking for with your existing lender or haven’t been happy with their customer service, it’s smart to check out what other lenders are offering
   
   
4. Consider splitting your home loan interest rate: if you want the flexibility of a variable rate home loan, while still retaining some stability, you could opt for a split loan. This means that a portion of your loan has a fixed interest rate, while the other part has a variable rate.

Remember that as your fixed rate draws to a close, this is a good opportunity to review your current loan and find a new loan that suits your up-to-date needs. Don’t be afraid to speak to an Aussie Broker if you’re feeling lost.

Is it possible to extend a fixed rate home loan?

Typically, it’s not possible to extend your existing fixed rate mortgage while retaining the same interest rate. You can organise a new fixed rate to replace your existing one when your fixed term is up.

If you like the idea of ‘setting and forgetting’ your home loan, you could consider opting for a longer fixed term.

Before you fix your loan again, consider what your plans are for the near future. Do you have renovation dreams that might require a dip into your home equity? Do you want to pay off your loan a bit more aggressively in the next couple of years?

If so, you might find the terms of most fixed rate loans a little bit restrictive. Since accessing equity usually requires a refinance and there are limits placed on extra mortgage repayments, you could be charged break fees while on a fixed rate home loan.

Many fixed rate home loans may not offer features such as offset accounts or redraw facilities.

What does it mean to ‘break’ a fixed rate home loan?

You may have heard of break fees in relation to fixed rate home loans. Break costs are essentially a fee that lenders charge borrowers who violate the terms of their fixed rate mortgage in some way. For example:

• Making extra repayments beyond the limit set by your lender
  
  
• Repaying your home loan early
  
  
• Refinancing your home loan
  
  
• Selling your home within the fixed period.

Break costs are charged so that lenders recuperate the losses they make from you breaking the loan terms.

They are usually calculated by assessing the time remaining in the fixed term and the difference between the lender’s cost of funds now and at the time the loan was settled.

If a lender’s cost of funds is lower now than it was when you first secured the fixed rate loan, they may be a bit more forgiving when charging break fees.

Before you do something to break the terms of your fixed rate home loan, it’s a good idea to chat to your lender about whether you’ll be charged break fees.

When to consider a variable rate home loan

If you’re coming to the end of your fixed rate loan, you may feel like changing things up. Some borrowers find fixed loans restrictive and turn to variable rate mortgages as a flexible alternative.

Variable rate home loans have an interest rate that fluctuates in accordance with the market, economy, cash rate, and the lender’s choices.

When interest rates drop, variable rate borrowers benefit. When interest rates increase, you can expect your interest rate to rise too. This means that your monthly repayments can change due to interest being calculated daily.

Features of a variable rate home loan may include:

• Ability to make unlimited additional repayments
  
  
• Easier refinancing without break fees
  
  
• Access to loan features like offset accounts and redraw facilities.

When interest rates are likely to rise, it’s often a good idea to consider fixing your interest rate so that you lock in a stable, competitive rate for the next 1-5 years.

If you’re coming to the end of your fixed rate period, consider speaking to an expert. Book an appointment with your local Aussie Broker to figure out your next steps.

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