The Pros and Cons of Switching from Variable to Fixed Rates

Understanding Variable vs Fixed Interest Rates

As an ADF member, understanding the difference between variable and fixed interest rates can significantly impact your financial situation. A variable interest rate fluctuates with market conditions, meaning your repayments can go up or down. In contrast, a fixed interest rate remains constant for a set period, typically between one to five years.

Many ADF members initially choose variable rates for their flexibility, but circumstances change. Whether you're seeking payment certainty or want to lock in current rates before potential increases, switching from variable to fixed through refinancing might be the right move.

Benefits of Refinancing to a Fixed Rate

Refinancing from a variable to fixed rate offers several advantages that particularly appeal to defence personnel:

• Payment certainty: Fixed rates provide predictable monthly repayments, making budgeting much more manageable during deployments or training exercises
• Protection against rate rises: If interest rates increase, your repayments remain unchanged during the fixed rate period
• Financial planning: Knowing exactly what you'll pay helps with long-term financial planning, especially important for military families
• Peace of mind: Eliminates the uncertainty that comes with fluctuating variable rates

Defence members often appreciate this stability, particularly when managing finances during overseas deployments or frequent relocations.

Potential Drawbacks to Consider

While fixing your rate has benefits, there are some considerations:

• Missing out on rate cuts: If variable rates decrease, you won't benefit during your fixed rate period
• Break costs: Switching loans early or making extra repayments above certain limits may incur fees
• Less flexibility: Fixed loans often have restrictions on additional repayments
• Rate comparison: You might find that current fixed rates are higher than variable rates

When Refinancing Makes Sense

Several scenarios make refinancing from variable to fixed rates particularly appealing:

If your current variable interest rate is higher than available fixed rates, refinancing could reduce loan repayments immediately while providing rate certainty. This situation often occurs when you access loan options from banks and lenders across Australia, as different institutions offer varying rates.

Consider refinancing when your fixed rate period ending approaches on another loan, or when you want to consolidate debts into one manageable payment. Some ADF members also refinance when releasing equity in your property for renovations or to expand their property portfolio.

Special Considerations for ADF Members

As defence personnel, you have access to unique lending benefits that civilian borrowers don't enjoy. When refinancing, you can check eligibility for special lender policies designed specifically for ADF members, including:

• Waived Lenders Mortgage Insurance (LMI) on loans up to certain amounts
• Low deposit loan options
• Streamlined application processes that account for military employment
• Access to better loan options with preferential rates

These benefits can make refinancing more attractive and potentially offset some costs associated with switching loans.

The Refinancing Process

The application process for refinancing involves several steps:

1. Financial assessment: Review your current financial situation and loan amount
2. Rate comparison: Research available refinance interest rates from multiple lenders
3. Documentation: Prepare bank statements and other required paperwork
4. Application submission: Complete the streamlined application process
5. Settlement: Finalise the switch to your new fixed-rate loan

A home loan health check can help determine if refinancing aligns with your financial goals and whether you could potentially access a lower interest rate.

Making the Right Decision

Deciding whether to refinance from variable to fixed depends on your individual circumstances. Consider factors like your current rate, available fixed rates, loan term preferences, and risk tolerance.

If you're approaching retirement or prefer payment certainty, fixing your rate might suit your situation. Alternatively, if you value flexibility and believe rates might fall, staying variable could prove more beneficial.

Some ADF members choose a split loan approach, fixing part of their loan amount while keeping a portion variable. This strategy provides some certainty while maintaining flexibility.

For those looking to change your loan term, consolidate debts, or release equity to buy the next property, refinancing presents an opportunity to restructure your finances comprehensively.

Refinancing from variable to fixed rates can provide valuable payment certainty and protection against rising rates. However, the decision should align with your financial goals and personal circumstances. As an ADF member, you have access to specialist lending options that can make refinancing more advantageous than standard commercial offerings.

Call one of our team or book an appointment at a time that works for you to discuss whether switching from variable to fixed rates suits your financial situation.