Switching from Fixed to Variable: Pros and Cons

Understanding Fixed Rate Expiry

If you're a dentist who locked in a fixed interest rate on your home loan during the period of historically low rates, you may be approaching or have already reached your fixed rate expiry. When your fixed rate period ends, your loan typically reverts to your lender's standard variable interest rate, which could be considerably higher than what you've been paying.

Many dental professionals who secured fixed rates between 1.99% and 2.5% are now facing the prospect of reverting to variable rates that could be 2% or more higher. This significant jump can impact your monthly repayments substantially, potentially adding hundreds or even thousands of dollars to your annual loan costs.

Conducting a home loan health check before your fixed rate period ends gives you time to explore your options and make an informed decision about whether to refinance your home loan or stay with your current lender.

Why Consider Refinancing to a Variable Rate?

When coming off a fixed rate, refinancing to a variable interest rate with a different lender or renegotiating with your current lender can provide several advantages:

Accessing a Lower Interest Rate

Lenders often offer their most competitive rates to new customers. By refinancing your mortgage, you may be able to access a lower rate than your lender's standard variable rate, which can save you thousands of dollars over the life of your loan. Even a difference of 0.25% on a $600,000 loan amount can result in savings of approximately $1,500 per year.

Enhanced Loan Features

Variable rate home loans typically come with features that may not have been available with your fixed rate product, including:

• Offset accounts that can reduce the interest you pay
• Redraw facilities allowing you to access additional repayments
• The flexibility to make unlimited extra repayments without penalty
• The ability to split your loan between fixed and variable portions
• Options for interest-only repayments on investment properties

These features can improve your cashflow management and provide greater financial flexibility as you build your dental career.

Accessing Equity Through Refinancing

As property values have increased in many Australian markets, you may have built substantial equity in your property. Refinancing provides an opportunity to unlock equity for various purposes:

• Purchasing an investment property to build your portfolio
• Funding practice ownership or expansion
• Debt consolidation to reduce overall interest costs
• Renovation projects to increase your property's value

For dentists looking to expand their property portfolio, releasing equity in your property through a cash out refinance can provide the deposit needed for your next purchase. Our team specialises in investment loan refinancing for dentists and can help you structure your loans appropriately.

The Refinance Process

Understanding the refinance process helps you prepare and ensures a smooth transition when switching lenders or loan products. Here's what to expect:

1. Loan Review: Assess your current loan terms, remaining balance, and financial goals
2. Compare Refinance Rates: Research current refinance rates and loan products available to dental professionals
3. Property Valuation: Your new lender will arrange a valuation to confirm your property's current value
4. Refinance Application: Submit your application with supporting documentation
5. Settlement: Once approved, your new loan settles and pays out your existing mortgage

The entire refinance process typically takes between 4-6 weeks, though this can vary depending on individual circumstances and lender processing times.

When to Refinance Your Home Loan

Timing your refinance application strategically can maximise your benefits. Consider refinancing when:

• Your fixed rate period is ending within the next 6 months
• You're stuck on a high rate compared to current market offerings
• You need to access equity for investment or other purposes
• You want to consolidate debt into your mortgage to reduce overall interest
• You require additional features like an offset account or redraw facility
• Your financial situation has improved, potentially qualifying you for a lower interest rate

For general dentists specifically, specialist mortgage brokers who understand the dental profession can often secure more favourable terms than you might achieve independently.

Potential Drawbacks to Consider

While refinancing can offer significant benefits, it's important to consider potential costs:

• Discharge fees from your current lender (typically $300-$500)
• Application fees for your new loan
• Government fees for registering the new mortgage
• Potential break costs if you're still within a fixed rate period

However, these costs are often outweighed by the long-term savings from accessing a lower interest rate and improved loan features. A thorough loan review can help you calculate whether refinancing makes financial sense for your situation.

Making the Switch: Fixed vs Variable

Deciding whether to switch to a variable rate, lock in another fixed rate, or split your loan requires careful consideration of your circumstances:

Variable Rate Advantages:

• Flexibility to make extra repayments
• Access to offset accounts and redraw facilities
• No break costs if you need to refinance again
• Potential to benefit if interest rates decline

Considerations:

• Repayments may increase if variable rates rise
• Less certainty for budgeting purposes
• Rates can change at any time

Some dentists choose to split their mortgage, keeping a portion on a fixed rate for stability while enjoying the flexibility of a variable rate on the remainder. This strategy can provide a balance between security and flexibility.

Reduce Your Loan Costs

Reducing the overall cost of your home loan should be a priority when refinancing. Beyond securing a lower interest rate, consider:

• Using an offset account effectively to reduce the interest-bearing portion of your loan
• Making regular additional repayments to reduce your loan term
• Reviewing your loan structure to ensure it aligns with your investment strategy
• Consolidating high-interest debts into your mortgage at a lower rate

For self-employed dentists, refinancing can also be an opportunity to restructure your loan to accommodate variable income patterns while still maximising tax effectiveness.

Your Next Steps

If your fixed rate period is ending or you believe you're paying too much interest on your current home loan, now is the time to take action. Conducting a comprehensive review of your mortgage can identify opportunities to save money through refinancing.

As mortgage brokers specialising in the dental profession, we understand the unique financial circumstances of dental professionals. We can help you compare refinance rates, assess whether you can potentially access a lower rate, and guide you through the refinance application process.

Don't wait until your fixed rate has already expired and you're paying your lender's higher standard variable rate. Call one of our team or book an appointment at a time that works for you to discuss your refinancing options and discover how much you could save.