Many borrowers love fixed rate mortgages because they allow you to lock in a low rate for one to five years. Even if variable rates increase, you will continue to make the same repayments for the remainder of the fixed term. But is it possible to refinance a fixed rate home loan and switch to a lender with a lower interest rate?
One of the potential risks of a fixed rate mortgage is that once you buy your fixed rate, you are obligated to pay it off until the end of the fixed term. Your repayments won’t change, even if your lender lowers their fixed rates for new customers, or if variable rates fall well below your fixed rate. This could allow you to make higher repayments than other mortgage holders.
So if you are having FOMO (fear of running out) with lower rates, you may want to refinance from your fixed rate. It is possible, but there may be a price to pay: the breakage fee.
What are the break costs?
Breakdown fees are fees you pay when you take out a fixed-rate mortgage before the end of the term. This is because when you take out a fixed rate home loan, you are actually agreeing to pay a certain amount of interest to your lender. Leaving a loan sooner would mean that the lender would lose your remaining interest payments, so they would charge a breakage fee to help make up the difference.
As a general rule, the sooner you exit the loan within the term, the higher the potential breakage costs. Your exact breakage fees may vary, but lenders often base the breakage fee on the banknote exchange rate (BBSR) used to borrow wholesale money to provide financial services. By comparing the current BBSR to where it was when you first took out your fixed rate mortgage and the remaining term of your fixed rate term, the lender can calculate their costs and pass them on to you as a fee. break.
Is it Worth Refinancing a Fixed Rate Home Loan?
Due to the potentially high cost of breakage fees, refinancing a fixed rate home loan may not always be worth it. Even if you switch to a home loan with a lower interest rate, it may take a long time for the interest savings to offset the higher transfer costs.
However, depending on your personal situation, an early exit from your fixed rate loan may be worth it. Breakdown fees can be lower if you refinance later in your fixed rate term, which can make them easier to budget.
A mortgage broker may be able to help you calculate what break-up costs you can expect and how long it will take for the interest savings on your new loan to offset these additional charges.