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
{ 10 comments… read them below or add one }
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
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 ?
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….
A mortgage in which the monthly principal and interest payments remain constant throughout the life of the loan.This type of Mortgage is called Fixed Rate Mortgage(FRM).
In Februart 2009 I puchased a home and aquired a fixed interist mortgage with the CBA. The loan is over 14 years fixed for 2 years. I assume the interist is fixed for 2 years, so U cannot understand why my interist rates keep rising each time the RBA raises interist rates. My question is if having fixed interist at a higher rate when taking out the mortgage loan, can the banks raise my interist in line with the RBA during the fixed interist time terms of contract?
Tom
My question is.
We currently have a personal of $17,000 fixed currently at 13.99% that expires in 2015 and a mortgage loan that is also fixed at 8.99% for the amount of $262,797.00. We have been told it will cost us $14,000 as an exit fee for the mortgage loan and $300 for the personal loan. Is it worth it, for us, to either break our personal loan and add it to our home loan, or exit both loans to a lower interest rate?
Please help ….
Just wondering whether you can advise me how much is payable for an early exit from a 5 yr loan (it would be finished in November 2012) interest only fixed term on $150,000 with the ANZ bank.
Thanking You
Amanda
i have a fixed home loan of 8% with cua due to illhealth we need
+++sell with 2yrs to go is there anything i can do to prevent huge fees
can yo advise me Brad
I have a westpac loan of $220,000 50% on fixed interest I know have sold and have been told my exit fee is approx $7500 any ideas of how I can get out of paying this high price? Bea Feasey I