Breaking fixed loan

[belleran]

We have a fixed loan on $185k @ 6.33% until March 2015. I am tempted to break the fixed loan. The payout figure today would be about $4400. I could refix for 12 months @4.85%. According to my cals I would be ahead. If I left it on variable I would be paying 5.13% at today's rate with ANZ Breakfree.

Does anyone know whether we would be ahead or not?

 

[tobe]

not without a crystal ball Im afraid. Who knows what the rates will be over the rest of your fixed term?

While a new fixed rate might be ahead, variable rates may drop further, and you might be out of the money again.

 

[belleran]

At 4.85% I wouldn't call that a disappointing situation to be in even if rates went lower.
It is likely however I will stay with variable if the calcs stack up in our favour to break as I would hope that in two weeks ANZ will drop variable rates again.

 

[MRO]

At 4.85% I wouldn't call that a disappointing situation to be in even if rates went lower.
QUOTE]

Did you think this when you fixed at 6.33%?

 

[Peter_Tersteeg]

You need to contact the ANZ to get a break cost figure. It's quite possible that the cost of breaking would already elminiate the savings you'd make. The only way to determine the break cost is to contact the bank.

 

[belleran]

My first post stated the break cost which I got from the bank but they don't provide any financial advice as to whether there is any advantage for me in these circumstances.
MRO - point taken

 

[peaches]

It's a value judgement. I have clients who will switch in order to save $200 a year and I have clients who can't be bothered to save $5,000 a year.

If the money is important to you, keeping in mind the effort then do it.

I believe people who use fixed rates in order to try an beat the market almost always lose.

 

[cmason]

By my calcs(unless they are wrong in which case as you were ) just using interest calculated monthly for simplicity and assuming there is 20 months between now and March 2015 you will be ahead by a couple of hundred dollars, thats not including any other fees(if any) involved in breaking the old and creating the new. Is that worth the time and effort it is going to take to change the loans over.

(6.33% * $185K) / 12 * 20 = $19,517
((4.85% * $185K) / 12 * 20) + $4,400 = $19,354

 

[belleran]

When doing my calcs I added the $4.4k onto the $185k and then worked out the interest for 20 months which meant I was ahead about $4k. Nonone at the bank has told me how they work it out.
If your calcs are right then the main advantage of breaking the loan is in achieving flexibility.

 

[MRO]

I believe people who use fixed rates in order to try an beat the market almost always lose.

I agree with this. Fixed gives you a certainty over you payments but I think you pay a premium for this certainty. I always go variable to my view is biased.

 

[Richard Feynman]

If this is an IP loan, (I've been told) you'll be able to claim the break fee as a loss on investment too, which will reduce your actual cost.

 

[belleran]

Thanks Richard. I will check up on that with my accountant

 

[cmason]

When doing my calcs I added the $4.4k onto the $185k and then worked out the interest for 20 months which meant I was ahead about $4k. Nonone at the bank has told me how they work it out.
If your calcs are right then the main advantage of breaking the loan is in achieving flexibility.

did you include the $4,400 in your calculations(if not that is probably why you came out $4k ahead), cause whether you put it on the loan or pay it up front it is still a cost to you and should be included. In the case you are putting it on the loan you are paying interest on the increase as well

 

[belleran]

Yes I put it on top of the current loan before I did the calcs

 

[Peter_Tersteeg]

did you include the $4,400 in your calculations(if not that is probably why you came out $4k ahead), cause whether you put it on the loan or pay it up front it is still a cost to you and should be included. In the case you are putting it on the loan you are paying interest on the increase as well

Yes I put it on top of the current loan before I did the calcs

You've got to include the $4400 in some way, but if you're going to capitalize it onto the loan, you need to consider the cost of that $4400 over the life of the total loan, not just the fixed period. Potentially 30 or more years.

 

[Bradsdad]

We have a fixed loan on $185k @ 6.33% until March 2015. I am tempted to break the fixed loan. The payout figure today would be about $4400. I could refix for 12 months @4.85%. According to my cals I would be ahead. If I left it on variable I would be paying 5.13% at today's rate with ANZ Breakfree.

Does anyone know whether we would be ahead or not?

If you go down this path make sure you don't tell them you want to break to re-fix as they don't allow this. You'll need to break to variable then apply to fix.

 

[rowena]

If you are using the following maths:
(6.33% * $185K) / 12 * 20 = $19,517
((4.85% * $185K) / 12 * 20) + $4,400 = $19,354

The only possible flaw in your logic is that you are Assuming that after the 12 month fixed period that the remaining 8 months will be at 4.85% or lower. It also depends on what discount you have with ANZ

4.85% X 185K for 12 months is 8972
8972 + 4400 = 13372 for the 12 months. In order to better off or equal then
19517 - 13372 = 6145 divide by 8 months = 768 per month.
768X 12 = 9216 /185000 = 0.0498 meaning, you would need to have the after 12 month var rate at 4.98% to pull even, otherwise if it is lower you would pull ahead.

This is all assuming your paying Interest Only in this period too.

 

[belleran]

Yours calcs are about right Rowena. We have decided not to break the fixed loan - it is just not worth it. We might save $200 but rates may go up also. Hopefully interest rates will still be lowish in 20 months.