The fixed-rate term on home loans expires. But it is not automatically a bad thing. The end of the fixed term is actually your opportunity to review your needs, as well as personal and financial circumstances. If the term is not long enough to pay off your entire loan, or your fixed home loan is not the best fit for your current needs and circumstances, you will have to decide what to do when the fixed term expires.
What are your options when the fixed term of your home loan ends?
It pays to be organised and know what you want to do before your fixed term ends. Starting your research around two months beforehand should put you in a good position and give you enough time to assess your options carefully. Your options can be summarized as the three R’s:
Refinancing is switching home loans, either with your existing lender or a new one. Make a pricing request with your lender first to make sure that you are on a competitive interest rate. But if your lender will not offer a good deal, you may consider switching to a new lender who is offering better rates.
You will have to pay fees to do a conversion, but doing so can help you save money in the long run. If fixed rates remain very low, it may be in your best interest to acquire another fixed-rate home loan. However, the downsides of a fixed home loan include the fact that you are often not allowed to make extra repayments (or only allowed up to a certain limit) and are penalised for paying off your loan early. So, if your financial situation has improved since you got your original loan and you want the flexibility of paying faster, it would be better to choose a variable home loan.
Another option is to refinance to a split loan, where one portion of the home loan remains fixed while the other portion changes to a variable-rate loan. This option offers some of the stability of a fixed portion while allowing you to pay down extra on the variable portion without penalty. Find out when you should use a split loan.
After the fixed-rate term expires, you can choose to refix your home loan if your lender allows it. Generally speaking, the maximum fixed-rate term is 10 years. For instance, after the 10-year fixed-rate period is over, you can refix for another 10 years on a case-by-case basis. But take note that when you refix, you will not get the special offers lenders give out to new fixed home loan customers. In addition, if you are going to sell or renovate your property, refixing may not be your best option.
The fine print of your home loan agreement dictates how the end of the fixed-rate term will be handled. In most cases, unless you decide to refinance or refix, the loan rate increases to the revert rate without any additional fees or paperwork, but it would be best to consult your mortgage broker to be sure about the best option for your situation. The revert rate will be a variable rate, usually the standard variable rate the lender offers. Unfortunately, in a competitive market, this rate can be as much as one percent higher than a variable loan.
If you let your loan revert now, you still have the option of refinancing to a better fixed rate again at a later date. Some economists are recommending this wait-and-see approach, predicting additional rate cuts over the coming months.
Can you break the fixed term of your loan?
There are ways to break a fixed rate home loan, including:
- Making extra repayments beyond what is allowed while the rate is fixed
- Repaying the loan in full before the fixed term ends
Different lenders may have different regulations regarding the fees associated with breaking the fixed-rate term. They may also have different names for break fees, such as early repayment adjustment, early repayment fee, early payment interest adjustment, prepayment fees and economic cost, and fixed-rate early termination fee.
Break fees can amount to thousands of extra dollars. If, for example, you refinance to a loan with a lower interest rate before the fixed term of your current loan ends, the additional break fees may outweigh the benefits of refinancing.
Calculating break fees is complex, but it is essentially based on three factors:
- The interest rate you locked into compared to the current market interest rate
(In general, the more the interest rate has dropped since you took out the loan, the higher the break fee will be.)
- The length of time remaining on your fixed-rate term
- The loan amount you initially borrowed
Breaking the fixed term of a loan can be difficult and expensive. Thus, as much as possible, wait for the fixed term to end before you carry out whatever plan you may have in mind.
What should you consider before switching home loans?
Switching home loans can potentially save you thousands of dollars in interest or enable you to take advantage of another loan’s features. But you should first determine if the benefits of switching are worth the costs.
To do this, see what loans are available from different lenders. Once you find some loans that offer the features you want, ask the lender for a key fact sheet on those loans to compare their interest rates, features and fees. The fact sheet should detail the following:
- How much you will pay off over the term of the loan
- What your repayments would look like with a rate increase
- How to repay your loan faster
- What fees and charges are associated with the loan
To help you in choosing a new loan, you can either use a mortgage comparison website or consult a mortgage broker. Once you have chosen a loan, consider the costs of switching, including break fees on your current fixed loan and start-up fees on your new loan.