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