Beginner's Guide to Refinancing from Fixed to Variable

Why Refinance from Fixed to Variable

Switching from a fixed rate to a variable rate gives you access to features like offset accounts and redraw facilities, along with the flexibility to make extra repayments without penalty. If your fixed rate period is ending or you're stuck on a rate that no longer reflects what lenders are offering, moving to a variable product can reduce your monthly repayments and open up options that weren't available under your fixed loan.

Consider a buyer in South Perth who fixed at 5.8% two years ago and is now six months from expiry. Their lender's current variable rate sits around 6.0%, but other lenders are offering closer to 5.6% with a full offset account. Refinancing before the fixed term ends means paying break costs, but staying put means missing out on lower repayments and useful features. The calculation depends on how much you owe, how long remains on your fixed term, and what your current lender is willing to offer as a retention rate.

We regularly see borrowers assume they need to wait until their fixed period expires, but in some cases the interest saved by refinancing early outweighs the break costs within six to twelve months.

What Triggers Break Costs and How They're Calculated

Break costs apply when you exit a fixed rate loan before the agreed term ends. Lenders calculate these costs based on the difference between your fixed rate and the current wholesale rate for the remaining period, multiplied by your outstanding loan balance.

If wholesale rates have risen since you fixed, break costs are usually zero or minimal. If they've fallen, the lender charges you for the interest revenue they'll lose by letting you out early. The exact formula varies between lenders, but the principle remains consistent.

In a scenario where someone owes $600,000 with eighteen months left on a 5.8% fixed rate, and wholesale rates have dropped, break costs might land between $8,000 and $15,000. If refinancing saves $400 per month, it takes twenty to thirty-seven months to recover that cost. For someone planning to stay in their property and confident rates won't climb sharply, that timeline can make sense. For someone uncertain about their next move, waiting until expiry removes the upfront cost.

Your lender is required to provide a break cost estimate if you request one, and that figure is valid for a set period. If you're comparing options, get the estimate in writing before making a decision.

Variable Rate Features That Make the Switch Worthwhile

Variable loans typically include offset accounts, which reduce the interest charged by offsetting your savings balance against your loan balance. If you keep $30,000 in an offset account linked to a $500,000 loan, you only pay interest on $470,000.

Redraw facilities let you access extra repayments you've made, which is useful if you need funds for renovations or unexpected costs. Fixed loans rarely offer redraw during the fixed period, and if they do, access is often restricted or comes with fees.

Unlimited extra repayments are another feature that matters if you receive irregular income or want to pay down your loan faster. Fixed loans cap extra repayments at a set amount per year, usually between $10,000 and $30,000, and charge penalties if you exceed that limit.

For South Perth residents near the river or Angelo Street precinct, property values have held firm even as interest rates climbed. If you bought in the area and have built equity, switching to a variable loan with an offset account gives you a place to park savings from rental income or salary while reducing your interest bill each month.

When Staying Fixed Makes More Sense

If you're within six months of your fixed term expiring and break costs are high, waiting it out is often the clearer move. You can still prepare your refinance application during that time so you're ready to switch the day your fixed period ends.

Staying fixed also makes sense if you believe variable rates will rise in the near term and you value the certainty of knowing your repayment amount. Some borrowers split their loan between fixed and variable to get the benefits of both, but that's a separate conversation from refinancing an existing fixed loan.

If your current lender offers a retention rate that matches or undercuts what you'd get by refinancing elsewhere, and they're willing to add features like an offset account, you might achieve what you need without changing lenders. This avoids application fees, valuation costs, and the time involved in a full refinance.

How the Refinance Process Works When Switching Rate Types

Refinancing to move from fixed to variable follows the same process as any other home loan refinance. You'll need to provide income evidence, a current property valuation, and details of your existing loan. Lenders assess your borrowing capacity based on current income and expenses, not what you qualified for when you first borrowed.

If your circumstances have changed since you took out your fixed loan, such as a drop in income or an increase in living costs, you may not qualify for the same loan amount. That can affect your ability to refinance if your property value hasn't increased enough to offset the shortfall.

Processing times vary, but most refinances settle within four to six weeks once you've submitted a complete application. If you're refinancing before your fixed term ends, factor in the break cost estimate and confirm the final figure with your current lender before you commit to a new loan.

A loan health check can clarify whether refinancing makes financial sense based on your current situation and what lenders are offering.

Accessing Equity While Refinancing

If your property has increased in value since you bought it, refinancing lets you access that equity for other purposes like funding an investment property deposit or consolidating other debts into your mortgage.

For someone in South Perth with a property now valued higher than at purchase, refinancing to a variable loan while drawing equity means you can take advantage of lower rates and additional features at the same time. Lenders typically allow you to borrow up to 80% of your property's current value without paying lenders mortgage insurance, though that depends on your income and other commitments.

Drawing equity increases your loan balance, which raises your monthly repayments. If you're using the funds to purchase an investment property, the interest on that portion of the loan may be tax deductible, but you'll need to speak with an accountant to structure it correctly.

What Happens When Your Fixed Rate Expires

When your fixed rate period ends, your loan automatically reverts to your lender's standard variable rate unless you take action. That revert rate is almost always higher than the variable rates offered to new customers, sometimes by 0.5% to 1.0% or more.

Your lender will send you a notice before your fixed term expires, usually 30 to 90 days in advance. That notice includes the rate your loan will revert to and may include an offer to re-fix or switch to a different product. Those offers are worth reviewing, but they're often less competitive than what you'd find by refinancing to another lender or negotiating directly.

If you wait until after your fixed rate expires and then decide to refinance, you avoid break costs entirely. The downside is that you'll pay the higher revert rate for however long it takes to complete the refinance, which can add hundreds of dollars in interest depending on your loan balance.

Call one of our team or book an appointment at a time that works for you to review your options before your fixed term ends and make sure you're not left paying more than you need to.

Frequently Asked Questions