Beginner's Guide to Switching From Fixed to Variable

Switching from a fixed rate to a variable rate can make sense, but the timing and the cost of leaving matter more than the rate itself. If you live in Fairfield and your fixed term is close to ending, you have more options than you might think.

This guide is for homeowners weighing up whether to move to a variable interest rate, either when the fixed period ends or earlier through a refinance.

Can You Switch From a Fixed Rate to a Variable Rate?

Yes. You can switch at any time by asking your current lender or by refinancing to a new lender. If you leave before the fixed term ends, you may have to pay break costs.

When the term ends, most lenders move you onto a variable rate automatically, often their standard one. That rate may not match what the lender offers new customers, so it pays to check before the date arrives. Our page on fixed rate expiry covers what to look for as your term runs down.

Fixed Rate Break Costs: How the Calculation Works

Break costs are a fee a lender can charge when you end a fixed loan early. They depend on how the lender's funding costs have moved since you fixed, how much is left on the loan and how long remains on the term.

In general, if rates have fallen since you locked in, the cost to exit can be higher. If rates have risen, the cost can be low or even zero. You can ask your lender for a written quote for your exact loan, and the figure can change from day to day. Ask for it in writing before you decide anything.

The trade-off is simple to state. Paying break costs only makes sense if the savings from the new loan outweigh the fee over the time you plan to hold it.

Is Variable Better Than Fixed for Your Situation?

Variable suits you if you want flexibility and the ability to pay extra, and you can handle repayments moving up or down. Fixed suits you if certainty matters more than flexibility.

A variable loan usually lets you make extra repayments without penalty and often comes with an offset account or redraw. The main risk is that your repayments can rise when the lender lifts its rate. The RBA cash rate is currently 4.85% p.a., and lenders can change their variable rates, including when the RBA cash rate hasn't moved, and will notify you of the change. You should be comfortable with some movement.

A fixed loan often limits extra repayments and may not offer a full offset account. If you are building wealth by paying down debt faster, those limits can cost you more than the rate difference suggests.

Example: Leaving a Fixed Loan Six Months Early

Consider a Fairfield homeowner with a $600,000 loan on a fixed rate with six months to go. They have a spare $1,500 a month and want to put it into an offset account, which their fixed loan does not offer in full.

They ask their lender for a break cost quote and compare it against what a refinance could save them. Using an illustrative rate of 6.75% p.a., interest on $600,000 is about $40,500 a year. Saving $1,500 a month would build to about $18,000 after a year, so the offset balance would average roughly $9,000 over that time. Interest would be charged on about $591,000 on average instead, which saves about $600 a year at 6.75%, before any other differences between the loans.

With only six months left on the fixed term, the offset benefit over that period would be well under $600. The outcome depends on the break cost quote, the discharge, application and valuation fees, and the rate difference between the loans. Offset savings of about $600 a year alone may not cover the costs of leaving. If the total switching costs are higher than the savings, waiting for the fixed term to end would be the better path. This is an illustration only, and your own numbers will differ.

Refinance Process: What Happens When You Move Lenders

The refinance process starts with comparing your current loan against others, then applying, getting a property valuation and settling with the new lender. Your new lender pays out the old loan and you start fresh with the new terms.

Your broker will usually check your income, debts and loan amount against the new lender's policy. The lender will then value the property and assess your application. Your old lender may charge a discharge fee, and the new lender may charge application or settlement fees. Add these to any break costs when you work out whether the move pays off. Our refinancing page explains the stages in more detail.

Features Worth Checking Before You Switch

Before switching, check whether the new variable loan offers an offset account, redraw and unrestricted extra repayments, and what these features cost. Some come with an annual package fee, and a lower rate with fewer features is not always the cheaper loan overall.

An offset account reduces the interest charged by counting your savings against the loan balance. Redraw lets you take back extra repayments you have made, though some lenders limit access. If you plan to use equity later for an investment property, ask whether the lender will allow it and how it affects your investment loans options.

Should You Wait Until the Fixed Term Ends?

Waiting is often sensible if the break cost is high and the end date is close. Once the term ends you can usually refinance without break costs, so the decision becomes a pure comparison of rates and features.

A practical step is to start reviewing your loan a few months before the expiry date. That gives you time to gather paperwork and compare lenders, so you are not stuck on a rate you did not choose. A loan health check is a good way to see where your current loan sits. You can also read about home loans more broadly if you are unsure what you need.

To see what you could afford to repay on a new loan, use a repayment calculator and test a few scenarios. Remember that variable rates can move, so allow some buffer in your budget.

Call one of our team or book an appointment at a time that works for you, and we will compare your current fixed loan against your options so you can see the numbers before you decide.

Frequently Asked Questions