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Many Australians will be coming off very low fixed interest rates in the coming six months. Here’s how refinancing might be a smart financial move.
Coming off a fixed interest rate can be a daunting experience, especially when interest rates are on the rise - but this is the reality that many Aussies who fixed their home loans at historically low rates are facing in 2023.
But the end of your fixed-rate period can actually be an opportunity to save money and make progress towards your financial goals.
When your fixed-rate period ends, Bankwest lending expert Stephen Harper says you can either choose to refinance to another fixed-rate loan, negotiate a new fixed rate with your current lender, or embrace the world of variable interest rates.
Coming off a fixed-rate mortgage can provide you with unexpected flexibility. Picture: Getty
If you do nothing, your lender will automatically switch your loan to their standard variable rate.
So, if you’re coming off a fixed rate in 2023, here are a few things to consider when looking to refinance amid rising interest rates.
1. Do your research and understand the features of the loans available
First and foremost, it's important to do your research and shop around for the best deal.
With interest rates on the rise, you may find that some banks have more competitive rates available than when you first took out your fixed-rate loan.
Take the time to compare different lenders and their offerings, and don't be afraid to ask for a better deal - you could end up saving thousands of dollars over the life of your loan from a better rate.
There are also several other features in a home loan beyond rate that are worth taking the time to research.
Make sure you understand the features of your loan and how they will impact your repayments.
For example, if your loan has an offset account or a redraw facility, this can help reduce the amount of interest you pay over the life of the loan.
You can use an offset account like any everyday bank or savings account. The difference is any money you have in it is offset against your home loan reduces the interest you pay.
Interest on your loan is calculated daily, so the more you have sitting in your offset account on any given day, the less interest you’ll be charged.
And if your home loan has a redraw facility you can access your extra repayments for free whenever you need.
2. Consider your options
Once you've found a lender with a competitive rate, it's time to think about the benefits of fixed versus variable-rate loans. While a fixed-rate loan can offer stability and predictability, a variable-rate loan can provide flexibility.
“For those considering fixing, Bankwest’s Fixed Rate Home Loan provides the certainty of knowing what your interest rate and repayments will be,” Stephen says.
“Homeowners can choose their fixed rate period from one to five years, and repayment frequency, be that weekly, fortnightly or monthly, which can help people manage their budget.”
With a variable-rate loan, your interest rate can go up or down in response to market conditions, leaving you exposed to interest rate risk. It also means that if interest rates go down, you could end up paying less interest and saving money on your repayments.
Refinancing can allow you to pay off your loan quicker by increasing the frequency of payments. Picture: Getty
Another consideration with a variable rate loan is that you have the ability to make extra repayments without penalty, which can help you pay off your loan faster and save even more money over the life of the loan.
Some lenders will also give you the option to split or switch your loan. By splitting your loan, you can make a portion of your home loan fixed and the rest variable. You can also switch between the two at any time.
3. Assess your budget
When interest rates are rising, it's important to consider the impact this could have on your monthly repayments.
If your fixed-rate loan is about to expire, you may be facing an increase in your monthly payments as you switch to a variable-rate loan. This could put pressure on your budget and make it difficult to keep up with your loan repayments.
In an environment of changing interest rates, it's important to budget carefully and make sure you can afford any increase in your repayments.
Some lenders offer flexible repayment options which allow you to make weekly, fortnightly, or monthly repayments depending on your pay cycle, which can also help with budget management.
4. Consider the costs
If you choose to refinance or negotiate a new fixed rate, there may be fees and charges involved.
These can include exit fees from your current lender, application fees for a new loan, and legal fees - be sure to factor these costs into your budget and the decision-making process.
It's important to assess the other costs of refinancing and weigh this up against other costs in your life like family. Picture: Getty
“Before going into a fixed-rate loan, it’s worth considering the implications if you decide to break the loan during the fixed period, as break fees might apply, and there can be other limitations, such as the number of additional repayments you’re permitted to make,” Stephen says.
5. Speak to your lender
If you're not sure what to do next, speak to your lender. They can provide you with information about your options and help you make an informed decision. They may also be able to offer you a better deal.
“Every homeowner’s circumstances are different, and what works best for one person might not be the best option for someone else,”
“It’s always a good idea to consult a financial professional, who can advise on your individual circumstances.”
No matter what you choose, the interest rate game is a fickle one and no one can predict what's going to happen next.
Therefore, it’s important to do your research and consider your options carefully and weigh up the costs and benefits before making a decision.
