Transitioning from a Fixed Rate: Why Refinancing Now Makes Sense
Many Australians will soon be taking advantage of very low fixed interest rates and refinancing might be an intelligent financial move in this time of transition. Here is why.
Coming off of a fixed interest rate can be intimidating, particularly with interest rates on the rise – yet this is precisely the reality for many Australians who secured home loans at historically low rates in 2023.
But the end of your fixed-rate period could actually present you with an opportunity to save money and take steps towards reaching your financial goals.
Bankwest lending expert Stephen Harper says when your fixed-rate period ends, your options for action include refinancing to another fixed rate loan, negotiating a new fixed rate with your existing lender or taking on variable interest rates as your new plan.
Unless you take action to change it, your lender will automatically switch your loan over to their standard variable rate.
If you are transitioning out of a fixed rate mortgage in 2023, here are a few key points to keep in mind when refinancing amid rising interest rates.
1. Research and understand features of available loans
Before signing any loan agreement, it’s essential that you research and shop around for the best deal.
With interest rates on the rise, it may be that certain banks offer more attractive loan rates now than when you initially took out your fixed-rate loan.
Take the time to research various lenders and their offerings, and don’t be intimidated to ask for better rates – you could save thousands over time with lower interest rates!
Beyond rate, there are several other aspects of home loans worth researching thoroughly.
Make sure that you fully comprehend all the features of your loan and their impact on repayments.
Your loan could come equipped with an offset account or redraw facility to help reduce interest costs over its lifecycle.
An offset account works similar to any regular savings account; any money in it will offset against your home loan balance to lower its interest payment.
Interest on loans is calculated daily; therefore, the more money that sits in an offset account on any given day, the less interest will be charged to your account.
And if your loan includes a redraw facility, extra repayments can be accessed without incurring an administrative fee at any time.
Once you have identified a lender with competitive rates, the next step should be assessing your options regarding fixed and variable-rate loans. While fixed rate loans provide stability and predictability, variable-rate loans allow more freedom and flexibility.
“Bankwest’s Fixed Rate Home Loan provides those pursuing permanent solutions the certainty of knowing their interest rate and repayments,” states Stephen.
“Homeowners can select their fixed rate period from one to five years, as well as payment frequency – whether weekly, fortnightly or monthly – which helps manage their budget effectively.”
Variable rate loans expose you to market conditions and the associated interest rate risk; conversely, should interest rates decrease, you could potentially pay less interest and save money in repayment costs.
Variable rate loans also give you the freedom to make extra repayments without incurring penalties, helping you speed up loan payoff and save even more over its lifecycle.
Some lenders provide you with the ability to split or switch your loan. By doing so, you can make part of it fixed while the remainder variable – and can switch back and forth at any time.
3. Assess Your Budget
With interest rates continuing to climb, it is crucial that you assess what impact they could have on your monthly repayments.
If your fixed-rate loan is coming to an end, switching to a variable-rate loan could create additional monthly payments that put undue strain on your budget and make keeping up with loan repayments challenging.
As interest rates shift, it’s essential that you budget carefully in order to be sure you can afford any increases in repayments.
Some lenders provide flexible repayment options which allow you to make weekly, fortnightly, or monthly repayments depending on your pay cycle, making budget management simpler.
4. Consider Your Costs
Refinancing or negotiating a fixed-rate refinancing may involve fees and charges which you should be aware of before proceeding with this course of action.
Exit fees from your existing lender, application fees for a new loan application and legal fees – be sure to factor these costs into your budget and decision-making process.
Before entering into a fixed-rate loan agreement, it’s wise to consider the potential repercussions if you decide to break it during its fixed term, including any fees that might apply as well as restrictions such as restrictions on additional repayments permitted during that period, according to Stephen.
5. Speak With Your Lender
If you’re feeling confused about your options and making an informed decision, speaking to your lender may provide invaluable assistance and perhaps offer you a better deal than expected.
“Every homeowner’s circumstances differ, so what works well for one may not necessarily work well for someone else,” according to Stephen.
“Consultation with a financial professional, who can advise based on your specific circumstances, can always be beneficial.
No matter which path you pursue, interest rate games are unpredictable and no one can anticipate what might come next.
Therefore, it’s essential that you conduct thorough research and assess all available options carefully, taking note of both costs and benefits prior to making a final decision.
