Understanding the Basics of Switching Fixed to Variable

If your fixed rate is ending, you can move to a variable rate either by staying with your lender or by refinancing to a new one. This guide walks you through how each path works, what it might cost, and how to decide, one step at a time.

If you are a Thornlie homeowner and this is your first time dealing with a loan like this, that is completely fine. Nobody is born knowing this stuff.

What Happens When Your Fixed Rate Period Ends?

When a fixed rate period ends, your loan usually moves to the lender's variable rate unless you choose something else. Your lender will normally contact you before this happens, so it pays to read that letter or email carefully.

A variable interest rate can move up or down over time, so your repayments can change. A fixed interest rate stays the same for the agreed term, which gives certainty but less flexibility. Many people looking at fixed rate expiry want to know their options before the date arrives, and that is a sensible thing to do.

Can You Switch From Fixed to Variable Before the Fixed Term Ends?

Yes, you can usually switch early, but you may have to pay a break fee. A break fee is charged when a fixed rate loan is ended before its fixed term is over, and it is not charged on variable loans.

How the fee is worked out depends on your contract, so ask your lender for a written estimate before you decide anything. Your lender cannot change the way the fee is calculated in a way that increases it once you are in the contract. If the fee is large, waiting until the fixed period ends may suit you more, even if the variable rate looks tempting now.

Staying With Your Lender or Refinancing: Which Is Right?

Staying put means asking your current lender to move you to a variable loan, while refinancing means moving the loan to a new lender. Both are legitimate, and the right one depends on the numbers.

When you switch lenders you may face a discharge fee on closing the old loan and an application fee on the new one. Switching within your current lender can also have a fee. If you have less than 20 per cent equity, lenders mortgage insurance may apply, which can add to the cost. ASIC's Moneysmart site lists these costs, and it is worth checking each one against what you would save.

There is also a protection built in for you. When a broker recommends a refinance, the law requires them to act in your interests. Costs of switching can be bigger than the savings, and in that case the right advice may be to stay where you are.

An Illustrative Example: Moving to Variable on a Thornlie Home

Consider a homeowner in Thornlie with a $500,000 balance and 25 years left, whose fixed rate is about to expire. We will use an illustrative rate of 6.75% p.a. for this example only. Real rates depend on your lender, deposit size and circumstances.

At 6.75% p.a. over 25 years, principal and interest repayments come to roughly $3,455 a month. Suppose a lender offers a variable rate 0.50 percentage points lower, at 6.25% p.a. Repayments at that rate come to roughly $3,298 a month, a difference of about $157 a month, or around $1,880 a year.

Now the cost side. If the switch involves a discharge fee and an application fee totalling, say, $600 to $900, the saving covers it within a few months. If a break fee of several thousand dollars applied, it could take years to recover. In this scenario the homeowner waits until the fixed term ends, avoids the break fee, and then moves. The outcome is a lower repayment without paying to leave early.

The trade-off is that a variable rate can rise. If rates go up, your repayments go up too, so it helps to check you could manage a higher repayment. You can test numbers with a repayment calculator before you commit.

Why Check Your Loan Before You Refinance?

A loan review shows whether a different rate or loan feature would actually save you money. Our loan health check looks at your current rate, fees and features side by side.

Variable loans often come with extras such as an offset account or redraw facility. An offset account is a transaction account linked to your loan, and the money in it reduces the balance your interest is charged on. The trade-off is that some loans with these features have higher fees or rates, so the extras need to be worth using. If you are after a lower interest rate, it also helps to ask your current lender first, as some will adjust your rate when asked.

How the Refinance Process Works Step by Step

The refinance process starts with a conversation about your goals, then a comparison of loans, an application, and a discharge of your old loan. You do not need to handle the paperwork alone.

First, you tell us why you want to switch, whether that is lower repayments, flexibility or something else. Next, we compare options and explain the costs of each. Then the new lender assesses your application. They check your income, spending and repayment history, and they must test that you could still manage repayments if rates rose by 3 percentage points above the loan rate. After approval, the new lender arranges the discharge with your old lender and your loan moves across.

If you want to borrow more at the same time, for example to renovate or release equity, that changes the picture. A bigger loan can mean a closer look at your borrowing and, for some home loans under government schemes, can affect eligibility. Our home loan refinancing page explains the general steps in more detail.

Does the Tax Office Care If You Refinance Your Home?

For a home you live in, interest is not tax deductible, so switching rates does not change your tax. If part of your loan is used to produce income, such as for a rental property, different rules can apply to that part, so speak with your accountant before making changes.

Frequently Asked Questions