Can you refinance a fixed or interest-only loan?

With interest rates currently at record lows, homeowners may be looking to save by getting a better rate. Although, if you’re on a fixed rate or interest only loan, you may be wondering if it’s even possible to refinance. In theory, it’s possible for any type of loan to be refinanced - the catch is that you could be up for unexpected costs. Here’s why it pays to know the full picture.

Article published 26 May 2021

Let's take a look.

If you have a fixed rate loan

Home loan interest rates have plunged over the past few years, and if you have a fixed rate loan you could be paying a higher rate than necessary. This can particularly be the case if you fixed your loan 2, 3 or even 5 years ago.

On one hand, refinancing to a new loan can see you save with a lower rate. The downside is that leaving   a fixed rate loan early can mean paying break costs.

Each lender has their own set of rules around how break costs are calculated. The common thread is that they can be complex, depending on the rate you’re paying, how market rates have moved since you fixed, and the time remaining on your fixed rate term.

Worst case scenario, break costs can run into thousands of dollars. This can potentially wipe out the savings of refinancing to a new loan.

That said, it’s worth knowing exactly how you stand. Your Mortgage Choice broker can explain how much you could be up for in break costs, and whether they outweigh the benefits of refinancing.

If it turns out the costs outweigh the savings, you may be financially better off seeing out the remainder of the fixed term before switching to a new loan.

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What if you’re making interest-only payments?  

The option to make interest-only payments is normally available with both fixed and variable rate home loans. Choosing to make interest-only payments means your regular loan payments will be lower, which frees up extra cash.

The downside is that you won’t be making inroads into the loan balance. This may be fine for investors, who plan to sell the property for a profit in a reasonably short timeframe. But for homeowners, reducing your loan balance over time will help you build home equity.

In terms of refinancing, if you’re making interest-only payments on a fixed rate loan, the issue of break costs described earlier is a key factor to watch for.

If you have a variable rate loan, break costs won’t apply. Lenders have been banned from charging exit fees on variable rate home loans since 2011.

Even so, refinancing can come with other costs. You may be asked to pay discharge fees on the old loan and upfront fees on the new loan. This makes it important to know for sure if refinancing will put you in front financially.

Expert advice matters - it pays to know the full picture

If you’re thinking of refinancing, speak with your local Mortgage Choice broker they can crunch the numbers for you and provide expert advice so you know how a refinance stacks up for your situation.

Give them a call today, so you can be sure the deal you’re in is the right one for you.

Posted in: Refinancing


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