What should you do when the fixed-rate term ends?

The end of a fixed term on a home loan is not automatically a bad thing. Instead, it may offer you an opportunity to review your needs, as well as personal and financial circumstances. 

Whether you decide to re-fix, refinance to a variable interest rate, or revert, there’s an option out there for everyone. 

In this article, we’re going to take a look at the three things you can do when your fixed-term rate ends, if there’s a penalty for breaking a fixed-term, and what you should consider before switching home loans.

What should you do when the fixed-rate term ends?

It pays to be organised and know what you want to do before your fixed term expires.

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.

1. Refinance

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 you 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.

A variable-rate mortgage can and will fluctuate depending on the RBA cash rate and the chosen lender’s situation. However, it does provide numerous features to borrowers including:

• Easier refinancing
• Access to offset accounts, redraw facilities, etc.
• Ability to make additional repayments

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.

You can also try our split loan calculator to find if the costs works out for you.

2. Re-fix

After the fixed-rate term expires, you can choose to re-fix 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 re-fix for another 10 years on a case-by-case basis. But take note that when you re-fix, you will not get the special offers lenders give out to new fixed home loan customers. So, if re-fixing seems like your best option, make sure you lock in a competitive interest rate.

In addition, if you are going to sell or renovate your property, re-fixing may not be your best option.

3. Revert

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 re-fix, the loan rate increases to the revert rate without any additional fees or paperwork. However, 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.

Is it possible to extend a fixed-rate period?

Once a fixed term rate expires, it’s generally not possible to extend the fixed-rate mortgage at its current set interest rate. 

Instead, a lender will provide you with a new fixed-rate offer as the interest rate market could be significantly different from when you first fixed your rate.

Is there a penalty for breaking a fixed-rate home loan?

If you’re considering breaking your fixed term before it expires, you will most likely incur break costs. Break costs are charged by lenders when borrowers do something to ‘break’ the loan term such as:

• Make extra repayments beyond what is allowed while the rate is fixed
• Repay the loan in full before the fixed term ends
• Refinance

Be aware that 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 fee 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:

1. The interest rate you locked into compared to the current variable market rate
2. The length of time remaining on your fixed-rate term
3. The loan amount 

In general, the more the interest rate has dropped since you took out the loan, the higher the break fee will be.

Breaking the fixed term of a loan can be difficult and expensive. Thus, as much as you wish to break the fixed term, it may be best to wait for it to end before you carry out whatever plan you may have in mind.

What happens when interest rates have increased after the fixed period ends?  

If interest rates have risen once your fixed period ends, there’s generally nothing major you can do. 

The best thing would be to look out for the most competitive interest rates on the market that will suit your circumstances. Whether this be with your existing lender or an entirely different one is up to you. Even a marginally lower interest rate could save you thousands in the long run so don’t undervalue the importance of seeking a good deal.

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

You want to choose a new home loan that’ll suit your needs. If you’re unsure of what might work best for you, consult a mortgage comparison website or a mortgage broker to get their insights.

First published 14 Dec 2018, last updated by Hanan Dervisevic 06 July, 2022

Also read: Understanding the benefits of having a fixed-rate home loan

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