Common Mistakes When Refinancing to a Fixed Rate

Refinancing to a fixed rate only makes sense if the certainty is worth more to you than the flexibility you give up. The errors tend to sit in the detail: the fixed term, the features you lose, and the cost of leaving early.

This article is for solicitors weighing a move from a variable interest rate to a fixed interest rate. It covers the points worth testing before you sign.

Does Refinancing to a Fixed Rate Make Sense?

Refinancing to a fixed rate suits a borrower who values repayment certainty over flexibility. It does not suit someone who expects to sell, make large extra repayments or restructure within the fixed term.

Fixed rates generally reflect lenders' funding costs and market expectations of future rates, so fixing is a trade-off and may not save you money. If rates fall, you stay on the higher repayment. If they rise, you are protected. The RBA cash rate is currently 4.85% p.a., but your own rate depends on your deposit size, your equity and your lender.

The question to ask is what you need the loan to do over the next one to five years. If your income is steady and you want a fixed budget, fixing can help. If your income varies with billing cycles or partnership distributions, fixed repayments can sit awkwardly with that cash flow.

Which Features Do You Give Up on a Fixed Rate?

Many fixed rate loans limit or remove offset accounts, redraw and unlimited extra repayments. Lenders differ, so confirm the terms of the specific product in writing before you apply.

This is an easy detail to overlook. A borrower who parks surplus cash in an offset account on a variable loan may lose that benefit by fixing. The interest saved by the offset can outweigh the rate difference. Some lenders let you split the loan, fixing one part and keeping the other variable with its offset account. The trade-off is a more complex structure and two repayments to manage.

A loan health check is a sensible first step. It compares your current features against what you would actually use.

Fixed Rate Break Costs: How Exits Are Treated

A break fee can apply if you end a fixed rate loan before the term finishes. It is not charged on variable loans, so it only becomes a factor after you have fixed.

Regulation 79A of the National Consumer Credit Protection Regulations 2010 (Cth) prohibits most fees on termination of a residential credit contract made on or after 1 July 2011. It does not apply to break fees or discharge fees. A lender also cannot unilaterally increase an early termination fee on a fixed rate loan.

The practical point is that the fee is tied to the lender's loss, so it can be material if rates fall during your fixed term. Ask the lender how the fee is calculated before you commit. Our page on fixed rate expiry explains what happens when a term ends.

What Does Switching Lenders Cost?

Switching can involve a discharge fee on the old loan, an application fee on the new loan and, in some cases, lenders mortgage insurance. Moneysmart lists these as the main costs of switching, and amounts vary by lender.

If you have less than 20 per cent equity, you may have to pay LMI again. Some lenders offer professional packages, such as an LMI waiver, but conditions on refinances vary by lender. Check this before assuming a higher loan-to-valuation ratio is workable.

Under ASIC's Regulatory Guide 209, a refinance should produce overall cost savings that outweigh lost benefits, or better meet your requirements. Those costs include any broker fees. A fixed rate refinance that saves little but gives you certainty can still be suitable, if that certainty is your stated objective.

Example: Fixing Part of a Loan to Protect Cash Flow

Splitting a loan can balance certainty and flexibility. The example below is illustrative and uses a rate of 6.75% p.a.

Consider a solicitor with a $600,000 loan on a 30 year term. At 6.75% p.a. on principal and interest, the monthly repayment is about $3,891. The solicitor wants certainty on most of the debt but keeps a cash buffer in an offset account.

The solution is to fix $400,000 and leave $200,000 variable with the offset attached. At the same illustrative rate, the fixed portion costs about $2,594 a month and the variable portion about $1,297 a month. The total matches the single loan, so the repayment is unchanged at the start. The difference is structural: the larger share cannot move with the market, and the variable share keeps the offset.

The outcome is a repayment the solicitor can budget around for most of the debt, with flexibility retained on the rest. The cost is that the fixed part carries a possible break fee and may limit extra repayments. In practice, real rates will differ for each portion, so use a calculator and get a quote from each lender.

Serviceability and Timing Checks Before You Apply

A new lender must assess your repayment capacity again, so a refinance is not automatic even if your repayment history is clean. APRA's serviceability buffer requires lenders to test new borrowers at 3 percentage points above the loan rate.

If you are only moving to a lower rate without borrowing more, ASIC's guidance says a lender can give particular weight to your repayment history. Adding to the loan changes that. Releasing equity for a purchase or renovation is a new assessment. See our page on equity release loans if that is part of your plan.

For tax, interest is deductible based on what the borrowed money is used for, not on the property securing it. If you refinance an investment loan and add funds for private use, interest generally has to be apportioned. Speak with your accountant before restructuring any investment debt.

If you hold a loan under the Australian Government 5% Deposit Scheme, refinancing to a lender outside the scheme ends its benefit, and you cannot increase the loan or extend the term while keeping it.

For a broader view of the process, read our guide to home loan refinancing for lawyers.

If you are weighing a fixed rate, call one of our team or book an appointment at a time that works for you. We will compare your current loan against the options and the costs of moving.

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