As we talked about in our last blog, mortgage interest rates across the country are lower than ever before. For households just getting on the market, now is the best time to start thinking about getting a new mortgage – but for those who are already on a fixed-term mortgage, you may be considering breaking it to take advantage of the lower rates.
Most banks are happy to let you break a fixed-term mortgage, but they will also charge what’s called a ‘break fee’ to do it. To see if this option may be right for you, let’s take a look at the real costs of breaking your mortgage.
How Much Could a Break Fee Cost?
It’s tricky to pin down an exact number for the cost of the break fee, as the way the banks calculate their fees may depend on a variety of factors. For example: the wholesale swap rate, the date you started your fixed term and the date you’re breaking this contract. Instead, we’d like to give you a rough idea of what you can probably expect.
Canstar published a great hypothetical that can help us illustrate best. Using their hypothetical, imagine a homeowner who has entered a two-year fixed home loan for $400,000 at a rate of 4.52% (the average at that time). Just six months later, the minimum rate has dropped to 3.99%, so the homeowner wants to switch.
By doing this, the homeowner could save $3,141.54 in interest for the rest of the term – but the break fees, which may be around $1,800.00 at this time, take a big bite out of those savings. Some providers may also charge additional administration fees and more. These savings are sliced again if the new interest rate is closer to what you’re already paying, or if there’s just a short time left on your current home loan anyway. Of course, this is just an example; your break fees will be calculated on the day of the switch, but at least you can see what might be involved.
Is Breaking Your Mortgage Worth It?
Switching home loans is one of those options that may work for some households and not for others, while the amount you could potentially save (or even lose) will depend on many contributing factors.
We like to tell our clients that it’s crucial to work out the ultimate benefit of breaking a loan before committing to anything. Although there may be some savings initially, we need to ask questions such as: are the fees too big to be worthwhile? And do you stand to make those fees back with the lower interest rate over time? Additionally, are you ready for the whole process of getting this done? For some, the extra hassle is something they’d rather not have.
Due to all these questions and shifting ideas, we are not able to advise you here if switching your home loan is ideal for your situation – but we’re always glad to chat with you to make the right calculations and go through your current contract together.
As your mortgage advisers we’re here to save you time and stress by negotiating with the banks on your behalf. The market is very competitive right now, so providers are often open to discussing their fees and interest rates. Get in touch with us any time to chat about how we can potentially save you money while breaking your fixed-rate home loan.
|Copyright © 2019 Finance Matters NZ Ltd. All rights reserved.|