Refinancing a fixed rate mortgage explained

If you’re thinking about switching your home loan for a better deal, either with your current lender or someone new, then it’s important to understand what goes into refinancing a fixed rate mortgage.

Refinancing is the process of switching out of your old home loan and into a new one. There can be a variety of reasons to consider refinancing, including accessing a cheaper loan rate or better loan features, or switching to a lender that aligns more with your current needs and preferences. Refinancing can also be a way to tap into home equity.

The kind of home loan you already have will have an impact on the refinancing process, as refinancing from a fixed rate home loan can potentially be more expensive than refinancing from a variable rate one, thanks to the fees you’re likely to pay.

In this article, we look at what happens when a fixed rate term ends, how refinancing a fixed rate mortgage can help you manage rising interest rates, and when it can be worth putting the wheels in motion to start the refinancing process.

Can you refinance a fixed rate mortgage?

If you are on a fixed rate home loan and would like to switch to a different home loan before your term is up, then the good news is that it is possible to refinance a fixed rate mortgage. It is worth keeping in mind, though, that doing so can come with costs attached.

If you break out of a fixed rate mortgage early, then typically you will be required to pay what is known as a break cost or break fee. There is no set amount for how much a break fee will cost, and it can depend on factors like:

1. The fixed rate you locked in at the start of the loan, relative to the current market rate
2. The length of time remaining your fixed rate home loan term
3. The loan amount you initially borrowed

If you are considering switching out of a fixed rate loan to a new loan product in order to save money, then it is important to take break costs into consideration. They have the potential to run into thousands of dollars, potentially wiping out the savings of refinancing.

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What happens at the end of a fixed rate term?

Fixed rate home loan terms are generally only available for periods of one to five years, which means at some stage, your fixed rate is going to come to an end. If you fixed your home at a time when rates were low, and they have since gone up, you may find yourself faced with higher monthly repayments than you’ve become used to, and you may well be wondering about your options.

If your fixed rate is due to expire, you can generally expect your bank or lender to get in touch with you before this happens, to inform you of the date when your fixed rate ends, as well as some of your possible options. It’s likely you will be given the choice of locking into a new fixed rate, or your loan will automatically switch over to the lender’s variable rate, also known as the ‘revert’ rate.

If you move onto a variable rate, then it may well be the case that this rate is higher than your old fixed rate. An example of this was seen at the beginning of 2023 in Australia, when many borrowers who took out home loans at low rates during the pandemic saw their fixed terms expired, and were faced with an environment of significantly higher variable rates.

That said, there is still a big variation in the rates charged by different lenders – especially between banks and non-bank lenders. So, when refinancing a fixed rate mortgage,  it’s important to shop around and compare home loan rates as you head towards the end of a fixed rate term. This lets you see how your lender’s rates shape up, and whether you could save by refinancing to a new loan or lender.

When should I think about refinancing a fixed rate mortgage?

It’s a good idea to allow yourself plenty of time to refinance a fixed rate mortgage. This way you won’t need to make a rushed decision, which could mean choosing a home loan that doesn’t match your needs. You may find it appropriate to start considering your options for refinancing around three months before the fixed term ends. This gives you time to:

• Decide if you want to re-fix or go variable — you may also be able to combine fixed and variable rates through a split rate loan.
• Work out whether refinancing will save you money — refinancing can come with costs, so you need to be confident that a new loan will put you in front financially.
• Compare loans — this lets you decide which lender has the loan best suited to your needs in terms of interest rate, fees and loan features.
• Prepare for refinancing — you’ll need to gather the paperwork required to apply for a new loan, and submit a loan application.

As each lender has its own systems and requirements, it’s hard to pinpoint how long refinancing will take. You could have a new home loan sorted in a matter of days, or it may take several weeks, or longer than a month, depending on the size of your lender and the number of applications they are processing.

Irrespective, the earlier you start to think about the process of refinancing, the greater peace of mind you may have knowing what your future loan repayments will be. It may also be possible to have your new loan settled and ready to go in time for your fixed rate to come to end.

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