Avoid These 4 Mistakes When Switching to Variable

Your fixed rate period has ended or is about to end, and you're considering whether to refinance to a variable rate.

The decision to switch from fixed to variable isn't just about chasing a lower rate. It's about regaining flexibility, accessing features like offset accounts, and ensuring your loan structure still matches how you use your property. For McKinnon homeowners, where many properties serve as both family homes and future investment stepping stones, that flexibility often matters more than the rate itself.

Refinancing Before Your Fixed Period Ends

Break costs apply when you exit a fixed rate loan before the agreed term finishes. These costs can run into thousands of dollars and are calculated based on the difference between your fixed rate and the lender's current wholesale funding cost for the remaining period. If rates have fallen since you fixed, the break cost will be higher because the lender loses the interest margin they expected to earn.

Consider a McKinnon homeowner who fixed at 2.5% for three years and wants to refinance with 18 months remaining. If variable rates have since dropped, the lender will charge a break cost to compensate for lost revenue. In most cases, the cost outweighs any benefit from switching early. The exception is when you're accessing equity for a pressing purpose, such as purchasing an investment property, and the delay would cost you the opportunity.

Most lenders allow you to start the refinance application up to 90 days before your fixed period ends, with settlement timed to occur the day after expiry. This avoids break costs entirely while still securing your new variable rate in advance.

Missing the Offset Account When You Need It

Variable rate loans typically offer offset accounts, while fixed rate products do not. An offset account is a transaction account linked to your home loan where the balance reduces the interest you pay without affecting your access to those funds.

For a household managing irregular income or building a buffer for future expenses, the offset can deliver more value than a slightly lower rate. A McKinnon property owner with a loan of $700,000 and $50,000 sitting in an offset account saves interest on the net $650,000 balance while retaining full access to that $50,000. That's a different outcome to making extra repayments into a fixed loan with limited redraw, where accessing those funds may require lender approval and processing time.

When comparing refinance options, the presence of an offset account should be weighted against the interest rate. A variable loan at 6.2% with a full offset often delivers a lower effective cost than a product at 6.0% without one, depending on how much you keep in the offset.

Assuming Your Current Lender's Rollover Rate Is Competitive

When your fixed rate ends, your lender will automatically move you to their standard variable rate. This rollover rate is rarely the lowest rate available, even within the same lender's product range. Lenders price their standard variable rates higher because they know most borrowers won't actively shop around at expiry.

We regularly see McKinnon clients who rolled onto their lender's standard variable rate paying 0.3% to 0.6% more than they could access by refinancing to a different lender or even switching to a discounted product with the same lender. On a $600,000 loan, a 0.4% difference costs roughly $2,400 per year.

A loan health check before your fixed period ends identifies whether your current lender's rollover rate is aligned with what's available in the market. In some cases, a phone call to your existing lender requesting a rate review is enough. In others, refinancing to a new lender delivers a lower rate, an offset account, and potentially a cashback offer that covers most of the refinance costs.

Refinancing Without Reviewing Your Loan Structure

Your financial position and goals may have shifted since you first took out your fixed rate loan. Refinancing to variable is an opportunity to restructure your loan, not just switch products.

Consider a scenario where a McKinnon homeowner initially borrowed as an owner-occupier but is now planning to keep the property as an investment when they upgrade. If they refinance without separating the loan into an investment portion and an owner-occupier portion, they lose the ability to claim the maximum tax deduction on the investment loan later. Once funds are mixed, the Australian Taxation Office won't allow you to retrospectively split them based on purpose.

Similarly, if you've built equity and plan to purchase another property within the next 12 to 24 months, refinancing now allows you to establish a separate split or line of credit against that equity. This pre-approval of equity access means you can move quickly when you find the right property, without waiting for a valuation and loan application at the time of purchase. For more on this, see our guide to investment loans.

The refinance process involves a property valuation, income verification, and a credit check. Lenders assess your borrowing capacity based on current income, expenses, and interest rate buffers. For McKinnon properties, valuations are typically straightforward given the area's established housing stock and consistent sales data, though older homes on larger blocks may require more detailed assessment if the land value significantly exceeds the dwelling value.

When Refinancing to Variable Makes Sense

Switching to variable works when you value flexibility, expect to make extra repayments, or want access to features your fixed loan doesn't offer. Variable rates also allow you to take advantage of future rate cuts without waiting for a fixed term to expire.

If your priority is certainty and you're concerned about rate rises, refinancing to another fixed term may suit your circumstances. However, many McKinnon homeowners find that a split loan structure, combining a fixed portion for stability and a variable portion for flexibility and offset access, delivers the right balance.

The refinance application typically takes two to four weeks from submission to settlement, depending on the lender and how quickly you provide supporting documents. You'll need recent payslips, tax returns if you're self-employed, and details of any other debts or financial commitments. Your new lender will organise the property valuation and handle the discharge of your existing loan at settlement.

Call one of our team or book an appointment at a time that works for you. We'll review your current loan, compare what's available across multiple lenders, and structure the refinance to align with how you plan to use your property and equity over the next few years.

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