Australians locked into fixed interest rate home loans are repaying their debt at a much higher rate than those committing to fixed and variable rate loans today.
With rates continuing their current downward trend, many fixed term borrowers are reviewing their property loan paperwork and wondering how to weigh up the viability of switching from fixed to variable – or changing to part fixed/part variable.
Those facing a year or more remaining on their fixed term are the most likely to be wondering whether it is worth breaking their current loan and moving to another loan. And rightly so. But is it worth it and how do you go about figuring that out?
Break costs rise each time interest rates fall and can range from a few hundred to tens of thousands of dollars.
The longer a borrower waits to check out their break costs, the more likely it is that they will be looking at a higher cost than the previous month.
The formula for calculating a break cost is complex, as many factors need to be taken into account but, basically, it is calculated by the lender’s ‘economic loss’. One factor is the amount of time still to run in your fixed rate period. Another factor, used by some lenders, is a comparison of your loan’s fixed rate with the fixed rate they are now advertising. However, they may use other reference rates.
A lender will publish some information about these calculations in their Usual Terms And Conditions, which are supplied when you signed your loan contract. The bottom line is that if you want to know your loan’s break cost then you must call the lender and request the charge for early repayment of your loan. Ask for this in writing, and you should expect it to include an expiry date.
The break cost is payable upfront at the time the contract is broken and some lenders may allow the new loan to be increased to cover the adjustment fee, but this may involve additional application fees and a full assessment of the borrower’s current financial situation.
With interest rates changing throughout the life of a loan, borrowers must carefully weigh up the pros and cons of choosing to switch loans, and remember that owning property is a long-term investment. It may well be the break cost outweighs the benefit of switching from the fixed loan to a different loan.
Steps for those pondering the advantages and disadvantages of breaking their fixed term:
Ask your lender to provide the total break cost if you were to switch from your current loan;
Call me on 1300 133 193 to see what other loans are suitable for your financial situation and lifestyle. Be sure to have your lender’s written early repayment advice when you call.
I will calculate whether you will save any money by moving to a different suitable loan, taking the break costs into consideration;
Remember that I can base my calculation on the current mortgage and market and interest rate environment. Interest rates move in cycles and it is difficult to predict where they will head over a five year period, let alone an entire loan term.
