When Commonwealth Bank came out with a 0.45% interest rate increase, 0.20% higher than the Reserve Bank interest rate increase, the media, politicians and the public were enraged. Having taken the brunt of the bad publicity most of the other banks and smaller lenders have also followed suit.

As each lender announces their interest rate increases, the negative publicity towards the Commonwealth Bank cushioned the blow for each of these lenders. In this industry, one leads and the others follow. Not so long ago Westpac were the bad guy when they increased their interest rates. How quickly we forget.

It has taken approximately 2 weeks for banks and smaller lenders to release their new interest rate increases and below is a summary from each of the major lenders.

• Commonwealth Bank – 0.45% and no news on exit fees
• Westpac – 0.35% and not going to abolish exit fees
• ANZ – 0.39% and abolishes exit fees
• NAB – 0.43% and abolishes exit fees
• ING Direct – 0.38% and abolishes exit fees
• St George – 0.37% no news on exit fees
• Suncorp – 0.39%

I expect smaller lenders to follow suit since most of them rely on similar types of lending .

I am not saying what CBA did was right but it seems that their decisionto increase interest rates beyond the RBA recommendation was not so sinisterwhen you take into account how the other lenders have followed.

The Reserve Bank of Australia meets in the first week of September to assess whether interest rates remain on hold or increase. Many economists are predicting that rates are likely to remain on hold.

While the variable mortgage rates are likely to rise or remain on hold, fixed rate loans are currently falling. Some of the deals you can find out there are the moment are as follows;

• 2 Year Fixed Rate – 6.79%
• 3 year Fixed Rate – 6.75%
• 5 Year Fixed Rate – 7.29%
• 10 Year Fixed Rate – 8.09%

Note that these rates are only valid for September 1st 2010. Please go to Smart Search Finance to find you the latest fixed and variable rate discounts.

Warning About Fixed Rates

It is important to discuss with your credit provider whether fixed rates are suitable for your lending needs. You will also need to consider that fixed rate loans may have the following restrictions;

• Most fixed loans do not allow unlimited repayments
• Extra payments beyond the annual limit are likely to incur a fee
• Break fees may apply if you exit the loan before the contract date
• Offset accounts and redraw may not be available

Many borrowers may find that it very difficult to get away from their fixed rate loans as the costs may be too expensive.

As we are seeing significant decreases in mortgage rates over the last 6 months many mortgagors with fixed rate loans are contemplating switching to a variable rate mortgage.

So what are the costs involved?

The main cost is known as “break costs”. This is the cost of breaking your fixed mortgage early.

The actual cost of breaking a fixed rate mortgage varies significantly. The calculation of the actual cost depends on the following factors;

1.The interest rate it was fixed at compared to the current wholesale lending rate

2. The term remaining on the fixed rate contract

3. The amount borrowed

For example, if a person has a $300,000 home loan, fixed it for 3 years at 8.00% and has 2 years remaining he could be up for significant break costs.  If the wholesale mortgage rate for bank XYZ was 4.00% the break costs would be around $24,000

Calculated as: $300,000 times 4% (the difference between the wholesale rate and the fixed contact rate) times 2 years (the number of years remaining) = $24,000

Basically, you are paying the whole interest rate differential up front to the lender. Unless you feel the interest rate is going to be significantly less than the wholesale rate in the future then breaking a fixed rate contract may be worth considering. Always contact your lender and find out the exact exit costs as each lender has different calculations for breaking a fixed rate contract early.

As you can see that breaking a fixed rate loan when interest rates have decreased can be very expensive. The opposite is true when fixed rates rise and in some cases a borrower may receive a cash refund from the lender.

If you would like help with breaking a fixed rate loan please contact us or leave a comment below

I often get asked what are the early exit fees for home and investment loans. With some lenders charging up to 2% for exiting a loan early it is important to read the fine print before signing on the dotted line.

Below are the exit fees you will pay for the following lenders -

Commonwealth Bank – $700 in the first 4 years

Westpac- $800 in the first 4 years

ANZ – $700 in the first 4 years

NAB – $900 in the first 4 years

Citi Bank  – First year = $1500, 2nd year = $1,200 a the 3rd year = $1,000

AMP – $1,000 in the first 4 years

ING Home Loans – Year 1 = $1,500, Year 2 = $1,050, Year 3 = $700, Year 4 = $350

Suncorp – $1,400 to $800 in the first 4 years

St George – $1,000 first 3 years

RAMS – 1% of the original loan amount in the first 3 years

Bank West – Nil

The above fees do not include discharge of mortgage fees or break costs if exiting a fixed rate loan early. Most lenders charge between $200 and $500 to discharge the mortgage. Breaking a fixed rate early varies significantly as it is calculated using the current interest rate at the time and the term remaining on the current contract. Usually there are zero exit fees if the wholesale fixed rate is higher than the contracted fixed rate. 

If you have any other examples or have encountered excessive exit fees please make a comment below.