Can you refinance a fixed rate home loan?

Fixed rate home loans offer numerous benefits, such as greater certainty, security, and, often, lower interest rates. However, one drawback is their complexity when it comes to refinancing. 

Fixed rates provide assurance not only to borrowers but also to lenders. While the lender commits to maintaining the interest rate for a specified period, the borrower agrees to stick with the loan during that time. 

But what happens if a fixed rate borrower wants to switch to a variable rate, change mortgage products, or switch lenders? 

They might be met with fees – break fees, to be more specific.

Can you refinance a fixed rate home loan?

It’s absolutely possible to refinance a fixed rate home loan. In fact, there are plenty of times when a borrower might be better off doing so.

“[A borrower] may consider refinancing out of a fixed rate home loan … if their fixed interest rate is higher than what’s on offer [in the market],” Icon Mortgages managing director Jasjeet Makkar told Your Mortgage.

“Or, sometimes, people have to break a fixed rate home loan because they want to buy a new property and their current bank can’t help them do so.”

In both scenarios, and others like them, a fixed rate borrower would be wise to carefully weigh the costs and benefits associated with refinancing. 

On top of the general costs of refinancing, a fixed rate borrower might also face break costs.

What are fixed rate break costs?

Lenders charge break costs, or break fees, to borrowers who back out of a fixed rate agreement. But not all break costs are equal, and not all fixed rate refinancers will incur them.

Each lender will calculate the break fees a fixed rate borrower might face if they were to refinance differently, Mr Makkar said.

These calculations typically consider the current balance of the home loan, the time remaining on the fixed rate period, and the difference between the rate at which a borrower is fixed and interest rates on offer at the time of refinancing.

“However, it's not always as simple as that,” he warned.

“If you fixed your mortgage at a rate that’s a lot lower than what banks are charging today, it's actually profitable for the bank when you break that loan, so you might not incur any break costs.

“I have seen plenty of cases where break fees are either nothing, or next to nothing.”

On the other hand, break fees can add up to tens of thousands of dollars.

Is it worth paying a break cost?

There are likely situations in which paying a break fee can be worthwhile, particularly if you can secure a far lower interest rate elsewhere, as the cost may be offset by future savings.

A fixed rate borrower contemplating refinancing needs to understand what their cost-benefit is, Mr Makkar said. That is, how much refinancing might cost compared to the benefit it could bring.

He advises those considering refinancing to reach out to a mortgage broker or financial advisor, even if they’re not certain they’d be better off refinancing.

“Part of a broker's responsibility is assessing suitability for a borrower,” he said.

“If a particular client comes to ask [about refinancing from a fixed rate home loan], and it’s not suitable for them to break that loan, we actually cannot continue [and] we have to tell them, ‘Hey, based on your requirements and objectives, your current product is still suitable’.

“If it’s unsuitable, then we'll break that down for them and advise them that there’s a cost benefit.

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Considering refinancing your fixed rate home loan to get a lower rate? Check out these low-rate variable home loans:

Important Information and Comparison Rate Warning

Why do lenders charge fixed rate refinancers break fees? 

While it might seem unfair that lenders can charge fixed rate refinancers large sums of money, there’s a good reason behind break fees.

When a person takes out a fixed rate home loan, their lender will typically go to the wholesale money market to get the funds to purchase the borrower’s home. It will pay interest on those funds, presumably at a lower rate than it charges the home loan borrower.

For that reason, if the borrower doesn’t uphold their end of the fixed rate agreement, the lender could be set to lose money. It will still have to meet its interest repayments, after all.

It will likely charge the borrower close to the amount that it will be set to lose due to the fixed rate agreement being broken.

How can a fixed rate borrower avoid break fees? 

If you’re not happy with your current fixed rate and don’t want to pay break fees, your options may be limited. Unfortunately, if you’re set on refinancing and have worked out that you’ll owe a break fee for doing so, you might just have to pay it.

However, if you’re still undecided, or you're considering taking on a fixed rate home loan but expecting you may need to refinance, here are three steps you could take to avoid break fees:

1. Finish out your fixed term
   The easiest way to avoid paying break fees is to wait out your fixed rate term before making changes to your home loan. However, there are situations where this might not be possible. For instance, if you’re forced to sell your property, you may not be able to ride out your home loan agreement.

2. Find a home loan that allows changes without break costs
   Ensuring your fixed rate home loan has the option of loan portability, sometimes known as a security swap, can help avoid such situations from popping up in the future. Home loan portability allows you to move house without taking out a new home loan, with the lender simply swapping the property that is acting as security for the loan.

3. Don’t sign onto a fixed rate you can’t commit to
   Life can surprise us, and certain financial situations are unavoidable. However, if you suspect that a fixed rate home loan might not suit you, it could be wise to reconsider before you sign on the dotted line. While fixed rates can sometimes be lower than variable rates, their lack of flexibility presents its own risk. Take the time to evaluate whether that risk is worth it.

How to refinance a fixed rate home loan

Refinancing a fixed rate home loan can seem daunting, but with careful planning and the right approach, its often a relatively smooth process.

Here’s a step-by-step guide to help you refinance your fixed rate home loan:

Step 1: Calculate the costs and benefits

Before you start the refinancing process, take a close look at your current fixed rate home loan and compare it to what's available on the market.

Note the remaining term, the interest rate, and any potential break costs or fees you might face for exiting the loan early. It might also be worth asking if your current lender could do you a better deal, potentially saving you the bother of refinancing.

This process can help you to to assess the cost-benefit proposition that refinancing might offer.

Step 2: Research refinancing options

If you've determined that it's worth refinancing, it's time to consider the options available to you. Take your time comparing different lenders and their current offers, including interest rates, loan terms, and fees.

Online comparison tools and mortgage brokers can be valuable resources at this point.

Step 3: Get approval from your new lender

Once you’ve identified a suitable refinancing option, you'll need to apply for it.

Ensure all the information you provide is accurate and complete to avoid delays. The lender will review your application, assess your financial situation, and perform a credit check.

Once your application is approved, the lender will provide a loan offer detailing the terms and conditions. Carefully review this offer, paying close attention to the interest rate, loan term, fees, and any special conditions.

If you have any questions or concerns, discuss them with the lender before proceeding.

Step 4: Finalise the refinancing

If you’re satisfied with the loan offer, accept it and proceed with refinancing.

Your new lender will largely handle the transition from your old loan to the new one. 

Step 5: Monitor your new loan

After refinancing, keep a close eye on your new home loan to ensure it continues to meet your needs.

It's also a good idea to stay informed of the market so you don't miss future refinancing opportunities that could save you money in the long run.

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