Understanding the Basics of Switching Fixed to Variable

If your fixed rate is ending or you want out early, you can switch to a variable rate. What matters is whether the savings outweigh the costs of moving.

A home loan can get ignored until a letter arrives about the end of your fixed term. This article covers what it costs to move, when it makes sense, and what to check before you sign.

Can You Refinance From a Fixed to a Variable Rate?

Yes. You can move from a fixed rate to a variable rate by staying with your lender or by switching to a new one. Either way, the loan is replaced with a new one, which is called a refinance.

Moneysmart calls a move to a different loan with your current lender an internal refinance. Your lender may charge a switching fee for it. Moving to a new lender can mean a discharge fee on the old loan and an application fee on the new one.

A fixed rate loan also has one more cost to check, which is covered below.

Fixed Rate Break Costs: What You Might Pay

A break fee can apply if you end a fixed rate loan before the fixed term finishes. It is not charged on variable loans, and it is not charged if you wait until the term has ended.

The law bans most termination fees on home loans secured by residential property (for contracts from 1 July 2011). It does not ban genuine break fees on fixed rate loans or discharge fees, so you may still pay those. Your lender sets the break fee amount, so ask for a written figure before you decide anything. Fixed rate contracts also limit how a lender can change the way the fee is worked out once you have signed.

If the break fee is large, compare it with the interest you would save by switching now. Waiting for expiry may be cheaper, but you keep paying your current rate until then. Our fixed rate expiry page explains what happens when your term finishes.

Is Switching to Variable Worth It? A Worked Example

Switching is worth it when the interest you save is more than the total cost of moving. Here is an example using an illustrative rate of 6.75% p.a.

Consider a teacher with a $500,000 balance and 25 years left. At 6.75% p.a., the repayment is about $3,455 a month. Suppose a variable loan from a lender was priced 0.50 percentage points lower, at 6.25% p.a. The repayment over the same term would be about $3,298 a month. That is roughly $157 a month less, or about $1,884 a year.

These rates are only for the example. Your rate will depend on your deposit size, your loan amount and your lender.

Now add the costs. If the discharge fee, application fee and any break fee came to $1,500 in total, the saving would cover them in under ten months. If those costs came to $6,000, it would take well over three years. In the first case, the teacher switches and keeps the lower repayment. In the second, they wait for the fixed term to end and then compare rates. The same sum works for any loan, so run your own numbers through a calculator before deciding.

What Do You Give Up by Moving to a Variable Rate?

The main trade-off is certainty. A fixed rate keeps your repayment steady for the term, while a variable rate can go up or down. Today the RBA cash rate is 4.85% p.a., and lenders can change their variable rates whenever they choose.

If your budget would be tight after a rise, a variable loan carries a real risk. A lower rate today does not mean a lower rate for the life of the loan. Some borrowers prefer the certainty of a set repayment, for example when on leave. Think about how a higher repayment would affect you.

On the other hand, variable loans often come with features that fixed loans limit. These can include an offset account and redraw, and they may also allow extra repayments without a fee. Lenders differ, so check each feature, because some come with a higher rate or an annual fee.

How Does Lender Assessment Work When You Switch?

A new lender must check that the loan suits you and that you can repay it. They look at your income, spending and repayment history.

ASIC guidance says a refinance to a lower rate with no extra borrowing is likely to be suitable when you have paid on time, the repayments will fall, and your circumstances have not worsened. Lenders also test whether you could afford repayments at a rate 3 percentage points above the loan rate. Some lenders may look at a switching borrower case by case, and a longer payment history can help.

If you borrowed against your home loan to cover other things, a new lender will look at that too. Adding to the loan makes the switch more than a like-for-like move.

What If You Have Less Than 20% Equity?

If you have less than 20% equity, you might be charged lenders mortgage insurance (LMI) on a new loan. This can cancel out the benefit of a lower rate.

Moneysmart says you can ask for a refund of some of the LMI on your current loan if you switch. It is worth asking. Read our page on LMI waivers for teachers to see when the cost may be avoided or reduced. Some conditions apply, and lenders set their own rules.

If you used the Australian Government 5% Deposit Scheme, moving to a lender that is not a Participating Lender ends the scheme benefit. Check that first.

How to Compare Your Options

Start with your current loan details: balance, rate, fixed term end date and the break fee. Then compare what other lenders offer for a similar loan amount. A home loan health check can help you see if your current loan still suits you.

If you want a broader view, our pages on home loans for teachers and mortgages for teachers explain the options for educators. A broker must act in your interests and can also tell you when staying put is the right choice. Any broker fees count towards the cost of switching, so ask about them upfront.

Tax can matter too. If part of your loan is for an investment property, a refinance can change what interest you can claim. Speak with your accountant before changing an investment loan.

To talk it through, call one of our team or book an appointment with a mortgage broker for teachers at a time that works for you.

Frequently Asked Questions