Mortgage fixed-rate term ending? Here’s what to do

Mortgage fixed-rate term ending? Here’s what to do

Fixed-rate home loans provide you with more predictability and can protect you against sudden increases in mortgage payments. However, your loan’s fixed interest terms will eventually end — leaving you with the inevitable question: what next?

Should you opt for another fixed-rate loan or switch to a variable rate? Can you refix your loan at its current interest rate? Or should you explore your options and refinance with another lender entirely?

We take a look at what happens when the fixed-rate term ends on your mortgage, and what your options are moving forward.

What is a fixed-rate mortgage?

A fixed-rate mortgage allows you to fix the interest rate on your loan for a set duration of time. This means you’ll know exactly how much your repayments will be every month, and you’ll be protected against any interest rate rises for the period of the fixed-rate term.

Fixed-rate interest terms aren’t set for the entire length of your mortgage. Lenders offer fixed interest rates for anywhere between 1 to 5 or even 10 years depending on the lender, and you’ll typically decide the fixed-rate period when you first take out your mortgage.

What happens when your mortgage rate expires?

Once this period ends, you’ll need to decide what to do next. You can either:

• refix your mortgage with your lender at a new interest rate;
• switch to another type of home loan such as a floating or standard variable rate home loan or a split loan; or
• refinance your loan with another lender that is offering a more competitive rate.

If you don’t choose to refix your mortgage (or if you don’t take any action at all), your interest rate will typically get switched to your lender’s variable interest rate until you specify otherwise. In the current interest rate environment, these rates tend to be higher than fixed interest rates, which could ultimately cost you thousands of dollars in a ‘loyalty tax’ over the years.

Refixing, floating, or split loan: which is the best option?

After months or years of making the same repayments, it can be daunting to once again have to decide what type of loan you’d like to take out. The market may have shifted significantly since you last fixed your interest rate, so it’s a good idea to do your research or speak to a broker to weigh up all the options and find the best rate for your future.

Refixing your loan with a new rate

If you like the predictability that comes with a fixed-rate loan, you can absolutely refix your mortgage with an up-to-date interest rate. 

Refixing your fixed-rate loan is a good option if you expect interest rates to rise in the future or if you want to continue making the same repayments for the foreseeable future. However, bear in mind that you will once again be locked into a rate for the period of your loan term unless you choose to end your term early and pay the break costs. An example of how a fixed rate can work against you is if the RBA drops the official cash rate, you’ll end up having to pay a higher amount of interest for your fixed term than you would have on a variable loan or if you decide to sell your property inside the fixed term

Last but not least, keep in mind that refixing your loan doesn’t mean you’ll be extending your existing interest rate with your lender. Depending on what the official cash rate is, you may end up having to make higher repayments in the future compared to your repayments on your current fixed interest rate.

Switching to a floating home loan rate

Floating home loans come with a variable interest rate, which fluctuates depending on the official RBA cash rate and your lender. You may be able to take advantage of a further interest rate drop in the future, however, it also opens lenders up to increasing your interest rate in the future. 

On top of having a variable interest rate, floating home loan rates generally come with additional features, including access to offset accounts and/or redraw facilities, the ability to make additional repayments, and greater flexibility should you choose to refinance your loan.

Opting for a split loan

If you’re not quite sure which loan is the right one for you or you’d like to keep your options open, keep in mind that you can also choose to have part of your home loan as a fixed rate and part of it as a variable rate. Some borrowers prefer a split loan because it gives them the flexibility to choose the split: for example, you could have 70% of your loan on a fixed rate and 30% on a variable rate, a 50:50 split, or anything in between.

Refinancing your home loan for a better rate

Regardless of which option you choose, the end of your fixed-rate term is an ideal time to step back and consider refinancing your loan with a different lender. 

Refinancing is where you take out a new loan with a new lender to repay your existing loan, and comes with a number of benefits, including access loans with better interest rates, lower fees, or additional features like a credit card, redraw facility, or offset account. 

On top of that, refinancing allows you to unlock additional home equity that you could use to fund renovations, debt consolidation, purchase an investment property, or even buy that car you’ve been eyeing recently. 

Fixed interest rate term ending? Let us help.

If your fixed-rate term is coming to a close and you need some expert advice, speak to the Rateseeker team today. Our licenced mortgage brokers will help you weigh up your options, answer any questions you may have, and assist you in securing the sharpest home loan rate for your unique situation. Get in touch with us now for your free no-obligation consultation.