Refixing in a reducing interest rate environment sounds boring as hell, doesn’t it?
But stick with me, because this could save you a lot of stress and potentially thousands of dollars over the life of your mortgage.
We have countless conversations with clients about what to do when their fixed rate expires. Especially now, when interest rates have dropped. And I find myself encouraging virtually everyone to keep their payments at the same level they’ve been making, even though the new rate might be lower. Why? Because it means you’ll chip away at your mortgage faster without any additional effort. Remember what I’ve said before about ‘paying more’? This is just another version of that approach.
What exactly is refixing?
When your fixed interest rate period expires, you need to select a new fixed term. That’s what refixing is — you’re resetting your fixed interest rate. And when you do this, you can choose from any of the fixed terms that are on offer.
It’s important to understand that you do not directly choose the interest rate. The rate is tied to the term you select. If it worked the other way around, we’d all just choose the lowest rate available, wouldn’t we?
Recently, one of our clients came to us feeling quite anxious about their situation. They had an interest-only loan for a rental property, and the interest-only period was about to end. This meant their payments would increase because they would now have to start paying down the principal too.
While they weren’t opposed to paying down the principal, they were worried about how it would affect their monthly budget. They knew that asking the bank to extend their interest-only arrangement would require a full loan application and assessment—a hassle they could definitely do without (and frankly, so could we).
But after looking at their situation carefully, we figured out this wasn’t going to be the problem they feared. Why? Because their interest rate was going to drop, which meant their new principal and interest payments would end up being about the same as their current interest-only payments.
“I’m so glad I talked to you, Cam,” was their relieved response.
I had a similar conversation with another client just this week who is about to go on maternity leave, which would mean her income would be reduced for a while. My first thought was to suggest asking the bank for an interest-only period to give them some budgetary breathing room. It seemed like a sensible approach, and they agreed it would be helpful.
This particular client had two fixed-rate expiry dates during their planned maternity leave. After doing the calculations, I discovered that the lower interest rate they’d get at the first expiry would result in principal and interest payments that were roughly equivalent to their current interest-only payments.
This meant the household budget could get the relief it needed, but it wouldn’t come at the expense of having interest-only in place for very long. The point of this tweak is that her maternity leave wouldn’t massively derail their longer-term goal of paying off their home.
Interest-only – it’s a temporary solution (for owner-occupiers)
But as an aside, here’s the thing about interest-only arrangements – they’re not a position you want to remain in for too long because your loan balance doesn’t reduce. And the longer you stay on interest-only, the less time you have to pay off the loan, which ultimately means higher repayments when you restart principal and interest payments.
So, interest-only should always be viewed as a temporary solution, not a long-term strategy.
The opposite is true if you own rental property. Call me if you want to know why.
Refixing – more than just interest rates
When refixing, it’s crucial to look beyond just snagging the lowest rate. You need to consider how your loan structure aligns with your current circumstances and future plans.
Many people think they can simply handle this themselves through their online banking portal. And technically, they’re right — anyone can select a new fixed-term mortgage when their current one expires. As I sometimes joke, even a monkey could make those selections.
But, the real question is not whether you can make a choice, but whether you can make a good, suitable choice that takes into account all the factors in your financial situation.
For instance, is your household expecting any changes in income? Are you planning a major purchase or renovation? Do you have other financial goals that might be impacted by your mortgage structure?
Banks and loan products matter too
When you put your refixing decision in the context of your broader financial picture and the things that may change in your future, you’re more likely to make a truly informed choice. You might end up with exactly the same decision you would have made otherwise, but it will come from a place of knowledge rather than just picking what looks cheapest at first glance.
Getting the mortgage in the first place is only half of what we do as mortgage advisors. The unseen but equally important part is keeping you financially secure when circumstances change. So, contact me for a chat – that’s what I’m here for.