Fixing your home loan means your interest rate and repayments are locked in for a period of time, typically one to five years.
So once you fix your loan, is it possible to refinance? And if so, how much does it cost?
Fixing your loan can be a great way to lock in a great interest rate and have cashflow certainty. However, there are a number of reasons you may wish to refinance:
To get a better interest rate - the market is highly competitive, with some lenders offering great deals. Your fixed-rate may have been competitive at the time but with lenders consistently cutting rates, you may be able to get a significant reduction on the rate you’ve fixed by refinancing.
You need greater flexibility - fixed loans typically don’t have a redraw facility or let you make a large number of extra repayments. You may wish to pay off your loan sooner, and as a result, need a variable loan for its flexibility.
Your personal situation has changed - A lot can happen in a few years; a new job, marriage or divorce, kids. Big events like this can drastically change your financial situation meaning your fixed loan may no longer be right for you.
You are unhappy with your lender - You may feel your lender has not communicated with you appropriately, hasn’t provided adequate support, or just hasn’t lived up to your expectations, leading you to want to refinance.
It is possible to refinance a fixed-rate mortgage. However, when you entered into the fixed-term, you signed a contract agreeing on the period of time the loan would be fixed. Refinancing the loan means you’re breaking this contract and as a result, the lender will require compensation for any loss.
This compensation can be very expensive, as you’re required to pay two fees: a discharge fee, which is usually a couple of hundred dollars, and a break fee.
Break costs, or break fees, are the main way a lender is compensated for you breaking the fixed-term on your loan early.
The formula for calculating break costs can differ between lenders and be complex, but it’s based on three main factors of your loan:
The market interest rate when you fixed, compared to the current market interest rate.
The length of time remaining on your fixed term.
The loan amount you initially borrowed.
As a general rule, the more interest rates have come down since you took out the fixed-rate mortgage, the higher the break fee will be.
Refinancing a fixed-rate loan isn’t a decision that should be made lightly. The most popular reason for refinancing is to get a better deal on your loan, typically through a lower interest rate.
But even if the rate you’re chasing is significantly lower than your fixed-rate, you might not be saving money. Break costs are extremely expensive and they’re not even the only fee you’ll end up paying. Your current lender may also require you to pay a discharge fee, while your new lender may require you to pay application fees.
Before you refinance it’s vital you weigh up the savings refinancing will afford you, with how much it will cost to break your fixed-term. If the cost to break is greater, you may be better offer sticking out the fixed term.
If you’re considering refinancing with us, contact one of our friendly lending specialists on 13 10 90 or book an appointment for a time that suits you.