What to do When Your Fixed Home Loan Term Ends

  • Posted 06 Jul
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What to do When Your Fixed Home Loan Term Ends

Fixed interest rates on home loans have become more popular in the past year as rates continue to drop, some now lower than 4 per cent. But there are a few catches.

First of all, you’ll want to look at the “comparison rate”, which accounts for all the fees associated with the loan. This number will undoubtedly be higher than the super low advertised rate, but can still be an excellent deal.

The other thing potential borrowers need to pay attention to is the term of the fixed rate being offered. If the term isn’t long enough to pay off your entire mortgage, you’ll have to decide how to proceed when the fixed rate expires. You’ll have to either pay the “revert rate” or go through a refinancing process.

Let’s look at the options in more detail.

Revert rates for fixed loans

The fine print of your mortgage agreement dictates how the end of the fixed rate loan will be handled. Typically, unless you as the home owner decide to refinance, the loan rate increases to the revert rate without any additional fees or paperwork, but it’s best to consult your mortgage broker to be sure on the finer details.

The revert rate will be a variable rate, usually the standard variable rate offered by the lender. The bad news is that in a competitive market, this rate can be as much as 1 per cent higher than a variable loan you could get by shopping around.

Of course if you let your loan revert now, you still have the option of refinancing to a better fixed rate again at a later date. Some economists are recommending this wait and see approach, predicting additional rate cuts over the coming months.

Benefits of refinancing

Refinancing requires extra homework. In fact, experts suggest you start researching your options two months before your loan ends. You’ll also have to pay fees to do a conversion, but this move can save money in the long run. If fixed rates remain super low, it may very well be in your best interest to acquire another fixed rate mortgage.

One of the downsides to a fixed home loan is that you are often not allowed to make extra payments or are penalised for paying off your loan early. So if your financial situation has improved since your original loan and you want the flexibility of paying faster, it makes sense to choose a variable rate.

Another option is to refinance to a split loan, where one portion of the home loan remains fixed and another percentage changes to a variable rate mortgage. This approach offers some of the stability of a fixed mortgage while letting borrowers pay down extra on the variable portion without penalty.

 

If you are searching for a fixed rate loan or need to refinance your existing mortgage, Australian Credit and Finance’s expert home loan advisors can answer all your questions. Contact us today to find out if you qualify for our low rates.

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