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Timing Your Switch Between a Variable & Fixed Rate

Switching your home loan can be a strategic move to save money and gain financial flexibility – and deciding whether to switch your mortgage between a fixed interest rate and variable interest rate is a significant decision that requires careful consideration of a number of factors. Interest rates and inflation, the property market and home values, and your personal financial circumstances all play crucial roles in determining the best time to refinance. Let’s explore these elements in detail, and shine a light on how important it is to get the timing right to achieve the best outcomes.

The Impact of Interest Rates and Inflation on a Switch Between Variable & Fixed Rates

Understanding interest rates and inflation is crucial when considering refinancing from a variable to a fixed interest rate home loan. Interest rates set by the Reserve Bank of Australia (RBA) influence the cost of borrowing. When the RBA increases rates, variable home loan rates typically rise, making monthly repayments more expensive. Conversely, when the RBA lowers rates, variable rates generally decrease, reducing repayments.

Inflation, the rate at which the general level of prices for goods and services rises, erodes purchasing power. High inflation often prompts the RBA to increase interest rates to stabilise the economy. Therefore, if inflation is predicted to rise, locking in a fixed rate might protect you from potential rate hikes. However, if the economic outlook suggests falling or stable inflation, staying on a variable rate could be beneficial as it might lead to lower repayments over time.

Timing your switch can significantly impact your financial situation. Given new fixed rate lending is at a record low of 1.75% as of May 2024 and as such the majority of new lending is at variable rates, is it a good time to switch to a fixed rate?

If you switch when rates are expected to rise, you might face lower repayments, however the big question is – for how long?

At the time of writing (July 2024), the current average variable rate home loan is 6.27%, with the best variable rate home loans up to 80% Loan to Value Ratio (LVR) at 5.99% – 6.14%. For fixed rates, here are the most attractive on offer currently:

• Best 1 yr fixed rate – 5.99%
• Best 2 yr fixed rate – 5.94%
• Best 3 yr fixed rate – 5.69%

Per the data above, the timing and direction of rate changes will determine if it is beneficial to fix your interest rates, or keep them variable. Keeping an eye on economic indicators and expert predictions can help you make an informed decision about when to switch (though of course, no crystal ball exists!).

The Property Market and Home Values

The state of the property market and home values also play a vital role in refinancing decisions. When property values are rising, your home’s equity increases, potentially giving you better refinancing options. Higher home values can mean more favourable loan terms and interest rates, as lenders view your loan as less risky. On the other hand, if property values are stagnant or declining, refinancing might not be as advantageous, and you could face stricter lending criteria or higher rates.

In a booming property market, a variable rate might seem attractive due to the potential for lower rates and more flexible repayment options. However, it’s essential to consider the long-term stability of the market. A sudden downturn could affect your home’s value and your ability to refinance again in the future if needed.

When home values are high, you might also have the opportunity to access additional funds through equity release. This could be beneficial for home improvements or consolidating other debts. However, it’s crucial to ensure that the overall cost of refinancing, including any fees and potential future rate increases, does not outweigh these benefits.

Personal Financial Circumstances

Your personal financial situation is perhaps the most critical factor when deciding to switch between a  variable and fixed rate. Assess your current financial health, including your income stability, savings, and expenditure. Consider your ability to handle increased monthly repayments if interest rates rise unexpectedly. If your budget is tight or your income is uncertain, the risk associated with variable rates might be too high.

Whereas, if you have a stable income and a healthy savings buffer, you might be in a better position to benefit from the potential savings a variable rate can offer. Additionally, think about your long-term financial goals. If you plan to sell your home in the near future, a variable rate might offer more flexibility without the break fees often associated with fixed rates.

Refinancing costs, such as exit fees from your current loan and application fees for the new loan, should also be factored into your decision. Calculate the break-even point where the savings from a lower interest rate outweigh these initial costs. Consulting with a financial adviser can help you understand the implications of refinancing on your overall financial plan.

Timing YOUR Switch Between Variable & Fixed Rates

Understanding the impact of interest rates and inflation, the current state of the property market, and your personal financial situation will help you make an informed decision. While the potential benefits can be significant, it’s equally important to be aware of the risks to avoid unnecessary financial strain.

At McKinley Plowman, our Finance team have several decades of industry experience and a passion for helping clients get the best possible deal for their circumstances. This means when you engage our brokers to work on your behalf, you can be confident that you will be making the most of the current economic and lending climate – whether that’s switching between fixed and variable rates, changing lenders, taking out a new loan, or anything else finance-related. If you’d like to see what we can do for you – including a FREE loan health check, contact us today on 08 9301 2200 (Joondalup), 08 9325 2411 (Perth), or via our website.

written by:

Paul Moran

Paul has over 35 years of experience in finding financial solutions for homebuyers, investors and business owners.
A licensed broker and member of the Mortgage & Finance Association of Australia (MFAA), Paul’s extensive experience includes 20 years with a major bank, seven of which were as commercial banking manager.
Paul delivers a holistic financial solutions to achieve the best possible outcome for a client’s personal or commercial lending needs. Paul also provides a comprehensive financial consultancy to business owners on commercial, equipment and invoice finance.