Breaking Fixed Rate Mortgages. One question pse

[Queen Bee]

Hi

Wasn't sure where to ask this.

There's been alot of talk in the news recently about how some people fixed their mortgages when they were high, and now it's gonna cost them alot to re-fix at a lower interest rate, been hearing amounts like $30k.

I have a quick question about this, why don't they refinance at a lower rate?

Or isn't it as simple as that! When we sold our rental property last year, we were on fixed and we paid something like $250 extra when house settled because it was on fixed.

Am I missing something here and having a blond moment!

Cheers
QueenBee

 

[Rob Williams]

If you have sigend a contract on a loan for, say, $300,000 fixed at 8.5% for 3 years and want to break out after 1 year, then the bank still will be wanting to still earn their "spread" for the remaining 2 years. That's the break cost.
So, if variable rates are, say, 5.5%, then they will be wanting (roughly) 3% of $300,000 x 2 (years). That's not how they work it out (only they now their spread at the time of the loan and now), but it gives you an idea of the break costs.
In this example, the break cost will be around $18,000. In my experience, it willbe more than that.
Maybe when you broke your fixed, the variable rate was higher than your fixed? In which case the bank actually made good money on the deal, over and above the fee you paid them.

 

[Queen Bee]

So what you're saying is that if I sold a house that was on a fixed rate I would still have to pay the breaking costs? Never knew that. Thanks.

 

[Rob Williams]

Whether you sell or re finance, you're stil breaking the original loan, as I understand it, so break costs would apply.

 

[Perp]

So what you're saying is that if I sold a house that was on a fixed rate I would still have to pay the breaking costs?

Yes, any action that results in you no longer paying the fixed-rate mortgage will trigger break fees. This may include any or all of the following: selling the property, refinancing with the same or another lender, paying out the loan with cash, changing other terms of the loan (eg P&I to I/O or vice-versa, loan term, repayment frequency, etc).

 

[Jamie_D]

If you sold your IP last year the SVR would of been (obviously) higher then now and possibly higher than your fixed rate, hence the low break cost

 

[fmx_rider]

Yes, any action that results in you no longer paying the fixed-rate mortgage will trigger break fees. This may include any or all of the following: selling the property, refinancing with the same or another lender, paying out the loan with cash, changing other terms of the loan (eg P&I to I/O or vice-versa, loan term, repayment frequency, etc).

For those who have loans locked for a long period and are looking at high break fees....another way to get around them in some cases is loan substitution - check with your bank.

One of my loans is fixed, the rest (3) are variable. My break cost at last check was $28k
So if I need to sell that IP in the fixed period due to unforseen circumstances, I intend to substitute that IP loan to pay out current PPOR variable loan. As it stands now, with rent and depreciation costs and neg gearing, it costs me a lot less to keep the IP loan than pay break costs or substitute into a term deposit leaving a 3-4% shortfall I'd have to pay.

 

[sparky23]

What happens if you pay the fixed loan out except for one dollar which means the account would still be open?

You lose again I am guessing?

 

[fmx_rider]

What happens if you pay the fixed loan out except for one dollar which means the account would still be open?

You lose again I am guessing?

Unlike variable loans, normally with fixed loans you are limited as to how much you can pay off (in addition to your normal repayments). I think mine is capped at $10,000 a year...

 

[sparky23]

Thought so - glad I don't have any yet then!

 

[Pushka]

It really is one thing they dont talk about with fixed loans. They bang on about the advantages but nothing about break costs. On my contract, it is some ambiguous statement like they will calculate a penalty according to the duration of the loan. I asked my loan company recently, it is fixed at around 7% for another 3 years; it is going to cost me $45,000 to break it. I will never get another fixed loan again.

 

[Jamie_D]

It really is one thing they dont talk about with fixed loans. They bang on about the advantages but nothing about break costs. On my contract, it is some ambiguous statement like they will calculate a penalty according to the duration of the loan. I asked my loan company recently, it is fixed at around 7% for another 3 years; it is going to cost me $45,000 to break it. I will never get another fixed loan again.

This is why it is imperative to sit down and work out your short/medium and long term plans prior to committing to a property and/or loan product.

 

[Pushka]

This is why it is imperative to sit down and work out your short/medium and long term plans prior to committing to a property and/or loan product.

Yeah, but things change. Like the Council refusing the next stage of the development even though the developer promoted it as a done deal; then the global meltdown, then the developer going broke......let alone anything happening to us personally!