Simple hacks to switch from fixed to variable rates

Many Noranda homeowners are approaching the end of their fixed rate period and facing a decision about whether to move to a variable rate loan.

Variable rates currently sit lower than many of the fixed rates locked in during the property market surge, which means refinancing may deliver immediate savings on your monthly repayments. The decision depends on your circumstances, your access to features like offset accounts, and whether you plan to make extra repayments over the coming years.

Why homeowners in Noranda are switching from fixed to variable

Switching to a variable rate gives you access to loan features that are typically restricted or unavailable on fixed rate products. Offset accounts, unlimited additional repayments, and redraw facilities become available when you move to a variable loan, and these features can reduce the total interest you pay over the life of the loan.

Noranda sits within a well-established area close to Morley Galleria and the Tonkin Highway, making it popular with families and owner-occupiers who value access to schools and local amenities. Many homeowners in the suburb purchased or refinanced during the low fixed rate period and are now coming off those terms as rates adjust.

Consider a homeowner who fixed their loan at 2.1% three years ago and is now reverting to their lender's standard variable rate, which could be significantly higher than the discounted variable rates available through a mortgage broker in Noranda. Refinancing to a competitive variable rate may deliver both a lower rate and the flexibility to make extra repayments when cashflow allows.

What happens when your fixed rate period ends

Your loan automatically moves to your lender's standard variable rate unless you choose to refix or refinance. The standard variable rate is usually higher than the advertised rates offered to new customers, which means staying with your existing lender without taking action can cost you thousands of dollars in additional interest each year.

Lenders do not automatically offer you their most competitive rates when your fixed term expires. You need to either negotiate with your current lender or refinance to a new lender to access lower rates. A loan health check can confirm whether your current rate is competitive and whether refinancing would deliver meaningful savings.

Accessing offset accounts and extra repayment features

Variable rate loans allow you to link an offset account to your mortgage, which reduces the interest charged on your loan balance. An offset account works like a transaction account, but the balance is offset against your loan when interest is calculated, which means you pay interest on a lower amount.

In a scenario where a borrower holds a loan balance of $450,000 and keeps $30,000 in an offset account, interest is only charged on $420,000. This can save thousands of dollars over the life of the loan without requiring you to make formal extra repayments or lose access to those funds.

Variable loans also allow unlimited extra repayments without penalty, which gives you the flexibility to reduce your loan balance faster when you have surplus income. Fixed rate loans typically restrict additional repayments to a set limit, often around $10,000 per year, and charge break costs if you exceed that amount or exit the loan early.

Understanding break costs if you refinance before your fixed term ends

If your fixed rate period is still active, your lender may charge break costs to exit the loan early. Break costs are calculated based on the difference between your fixed rate and the current wholesale rate your lender can access for the remaining term. If rates have fallen since you fixed, break costs can be substantial.

Your lender is required to provide a break cost estimate if you request one. In some cases, the savings from refinancing to a lower variable rate may outweigh the break costs, particularly if you have several years remaining on your fixed term and the rate difference is significant. However, if your fixed term is due to expire within a few months, it may be more efficient to wait until the term ends and avoid break costs altogether.

How the refinance process works when switching to a variable rate

Refinancing to a variable rate follows the same process as any other home loan refinance. Your new lender will assess your income, expenses, and the current value of your property to determine your borrowing capacity and loan-to-value ratio.

Most lenders will order a property valuation as part of the refinance application. If your property has increased in value since you purchased or last refinanced, your loan-to-value ratio may have improved, which can give you access to lower rates and remove the need for lenders mortgage insurance on any additional borrowing.

The refinance application typically takes two to four weeks from submission to settlement, depending on how quickly the valuation is completed and whether any additional documentation is required. Your mortgage broker will coordinate the application, liaise with your new lender, and arrange settlement so the transition happens without disruption to your repayments.

When refinancing to a variable rate may not suit your circumstances

Variable rates move in response to changes in the official cash rate, which means your repayments can increase if the Reserve Bank raises rates. If you prefer certainty and want to lock in your repayments for a set period, refixing may be more appropriate than switching to a variable loan.

Some borrowers also refinance to access equity for other purposes, such as purchasing an investment property or funding renovations. If you're looking to unlock equity and prefer the stability of fixed repayments during that period, a split loan structure may give you the flexibility of a variable rate on part of your loan while keeping the remainder fixed.

Call one of our team or book an appointment at a time that works for you to review your options before your fixed rate period ends.

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