The news has been posting stories non-stop over the last few months about interest rates rising. A seven-month period in 2022 saw the cash rate increase by 2.75%, causing many banks to pass these increases on to their customers. This has led some people to consider what home loan options are available to them.
A fixed rate home loan is a loan where the interest rate is fixed for a certain amount of time, usually between 1 and 5 years here in Australia. Having a fixed rate is just one of the options available to you.
Refinancing your home loan to a fixed rate can still be done at any time subject to the lender’s terms and conditions. That said, an optimal time to do it would be when the benefits outweigh the negatives while still being within your financial risk tolerance. Contact your mortgage broker to help refinance your home loan to one that suits your needs.
Why Refinance to a Fixed Rate Home Loan
Refinancing has many pros, but you should also be aware of any cons. Some of these are listed below to help you consider whether it might be right for you.
Pros of Switching to a Fixed Rate Home Loan
- Better Rate – Recent cash rate rises have seen some fixed rates lower than the current variable rate. Interest rates can easily be compared between lenders, but ensure you include any fees that could occur when refinancing.
- Fixed Repayment Rate – If you are worried about interest rates rising, having a fixed rate can give you peace of mind knowing that you’ll be paying the same amount each week, fortnight or month of the fixed rate term, depending on how often you pay. .
- Change Lender – If you’re unhappy with your current lender, you might want to change to another one that might have the support you want, or which has closer branches.
- Consolidate your debts – You may have the option to consolidate your current debts into the loan when refinancing. The benefit of this is that your interest rate may be much lower than a personal loan, credit card, or car loan.
- Shorten or Extend Loan – It is a great time to review how much you are currently paying, the current timeline of the loan, and your financial risk. Then when refinancing, you can look at extending or shortening the life of the loan.
- Cashback Bonus – Various banks offer an incentive when you refinance your home loan to them. This could range up to a few thousand dollars depending on the size of the loan and various other factors.
Cons of a Fixed Rate Home Loan
- Less flexible – Extra repayments unavailable or capped, may not have access to extra features such as redraw or full offset accounts. If this is important to you, an option to consider might be a split loan with part on a fixed rate and part on a variable rate.
- Rate is locked in – Unlike a variable rate home loan, the interest rate cannot rise and fall. Your rate is locked in initially for the period of time you’ve selected. This is a downside because it may fall well below the rate you are currently paying and there may be a break fee to change back to a variable rate early.
- Fees – LMI, settlement fee, loan establishment fee, mortgage registration fee, loan service, and/or exit fees and charges.
- Break Cost – If you’re not happy with your interest rate, lender, or loan there may be a hefty cost to break your fixed rate loan. This is a good reason to think about how long you plan to fix your rate for if you are planning on refinancing again in the near future.
- Extra Work – It is common that once your fixed rate period ends your loan will transfer to a variable rate. You will need to remember to review your home loan prior to the end date to determine if you want to refinance into a new fixed rate or leave it at a variable rate. Using a confident broker who keeps track of these for you is one way to keep on top of this.
Consolidating Your Current Debt With a Fixed Rate Refinance
You may have the option of consolidating debts you have into your home loan when refinancing. This way you are borrowing against the equity in your home. People look into this because the home loan rate can be a lot lower than credit card and personal loan interest rates.
Not every debt can be consolidated and it depends on the policy of the home loan you have. That is why it is important to have someone knowledgeable like a mortgage broker to help you is important.
Can You Split a Home Loan Between a Fixed and Variable Rate
If you want to be able to have an offset account, make extra repayments beyond a certain amount, or have other features found commonly in a variable rate loan, it may be worth looking into having a split home loan. A split home loan allows you to have two or more different loans of various sizes.
Example:
You could have a home loan of $800,000 total but split into two loans.
- Loan 1: $500,000 – Fixed Rate.
- Loan 1: $300,000 – Variable Rate.
This gives you the features of both a fixed and variable rate home loan.
One reason you would look into doing this is if you wanted the options available with the variable rate while also having the majority of your repayment being on a fixed rate. That way you won’t get a significant surprise if the lender raises your home loan’s interest rate.
Since each lender and their home loans have different policies, you need to have a good understanding of what each of the loans allows you to do. You also want to make sure you know what options you want available in case anything changes in the future for you. It is also good to workshop different scenarios to ensure you make the right choice. This is why it is imperative that you use a knowledgeable mortgage broker who can go over this with you and provide a solution that fits your needs.
Why You Should Use a Mortgage Broker to Refinance
When you use a mortgage broker, you can be confident that they are working in your best interest. Mortgage brokers have a legal obligation to act in their clients’ best interests and to prioritise those interests above their own.
This means mortgage brokers are required to prioritise the costs of a home loan or any other credit assistance they provide to a consumer. They also need to consider items that do not associate with cost but still affect the consumer. If the broker doesn’t believe an option you request is not in your best interest, ASIC expects the mortgage broker to make reasonable efforts to explain why the feature of the offer may not be of good value to you.
This best interests duty does not apply to banks.
Your mortgage broker is well-placed to work with you whatever your unique situation, current and future goals, and financial risk.
What Do You Need to Do
Contact us at Read Finance if you are interested in discussing your refinance options. Click HERE to fill out a form and we’ll get back to you usually within 4 business hours or use the form on our Contact Us page.
