Fixed Rate Mortgage Exit Fees

February 8, 2009 by Administrator
Filed under: Mortgage Exit Fees 

fixed_rate_break_costsMany 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

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Comments

3 Comments on Fixed Rate Mortgage Exit Fees

  1. Sianny on Wed, 18th Feb 2009 09:45

    2. Is the wholesale rate the same as market interest rate ? Where can we find the information? If RBA has already stated cutting down the interest rate to 3.25%, does 3.25% mean the wholesale rate? We are a bit confused, we sold our house, with bad luck we have to pay the break cost for fixed rate and the interest rate cut down while we are waiting for the settlement day. But the strange thing, our bank always give us different break cost figure every week and always increasing too. We thought the break cost should be the same if no further notice from RBA about cutting down the interest rate again. Please give us more information about this. Thank you

  2. Debbie on Thu, 12th Mar 2009 19:48

    3. I have a question…

    we have a mortgage of $680.000 fixed at 8.25% over 5 years CBA (we have 4 years to go) and 29 years left overall.
    On contacting the CBA our exit fees will be approx $80.000
    Is it worth remortgaging ???

    No One seems to be able to answer this one ?

  3. FinancialServicesRenoNV on Sat, 28th Mar 2009 22:50

    4. Greetings all members,

    I would just like to say hello and let you know that I’m happy to be a member – been a lurker long enough :)

    Hope to contribute some and gain some knowledge along the way….

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