Fixed Loan Break Fees

H

HiEquity

Hi all

I have been quoted a significant break cost for a loan I currently have fixed at 7.25% for another three years with Westpac. The guy at the bank didn't fill me with confidence that he knows what he is talking about and couldn't / wouldn't divulge what the Bank's current wholesale interest rate is, which is the main determinant in the calculation from what I can see of the example algorithm in our loan contract.

Does anyone know if this sounds right? Is the wholesale funds rate that far below the retail rate? Current Westpac variable rates are circa 8.7%. From what I can see there should be no break fee if our fixed rate is below the wholesale rate, unless I'm missing something?

Thanks for any help...
 
Hiya Aus

Thats not a break fee.

Thats in addition :)

and is an economic break cost.

The bank has "sold your loan" to someone at rate x.

If they deem to have lost money on the deal, then you will be asked to cough up.

This is reasonable since the fixed rate contract must apply for both the lender and the borrower .


ta
rolf
 
Hi Equity,

sorry this doesn't help you at all (just sharing really) but I was just quoted $14750 to break a 5 year fixed term (after 6 months) on $285000.

My fixed term interest rate is 8.64%. Their current variable is 8.83% and their current 5 year fixed rate is 8.99%. BankWest.
 
Rolf Latham said:
Hiya Aus

Thats not a break fee.

Thats in addition :)

and is an economic break cost.

The bank has "sold your loan" to someone at rate x.

If they deem to have lost money on the deal, then you will be asked to cough up.

This is reasonable since the fixed rate contract must apply for both the lender and the borrower .


ta
rolf
Click to expand...

oh i see. yes i had this once, complete rubbish, their calculations are way off and loaded in their favour
 
about a month ago I broke a 10 year fixed rate loan with CBA. I was 9 months into the 10 year rate and I was fixed at 8.90% (before wealth pack discount)

Their current 10 year fixed rate at the time was 8.94 so I didn't have to pay anything other than their $300 fee. 3 days later the fixed rate fell to the current 8.69% so I guess now i would be charged an exit fee should I had unfixed it now.

CBA were very fair.. but that is the benefit of going with a reputable bank, not a one man show outfit.
 
Token Funder said:
Did you check out the costs of discharging prior to signing up or did the sweet smell of the rate overwhelm the odour of the fees?
Click to expand...

I have a fixed rate loan with ING.

The costs of discharging are not ascertainable in advance. The contract goes so far as to state this in a footnote. Furthermore the calculation relies on functions that are not defined in the contract - therefore even if you had the full data set it would be impossible to calculate the break fee on the basis set out in the contract without reference to another set of documents which I was not provided.

I was very unhappy with ING on this specific point when I entered into my current finance arrangements. I consider it unreasonable that they deliberately hide the basis on which the break fee is calculated - it really pisses me off.

Maybe the problem is that ING is a shonky outfit and not a reputable bank?
 
As has been noted, theres a difference between break fees and discharge fees.

Discharge fees are "usually" flat fee or a %age of the loan amount.

The way we explain a fixed is say if you break a fixed - you've contracted with the bank that you will be with them for "X" years on the fixed. They count on this and sell the loan off, or do whatever they do.

As we all know (or should know) a lender isnt going to lose money if they can help it

If you go to vary the contract, you're the one breaking it, not the bank.
 
Im happy to recompense the bank for the loss they may suffer. That is a cost of doing business.

Im very unhappy that the bank deliberately conceals the manner in which they calculate the loss. That level of non disclosure amounts to an abusive market practice.
 
In my fixed rate loan with ING the specific formula is included but the formula uses factors which are not defined in the contract.

For simplicity sake lets pretend the contract says the break fee is:

[A + B] / C

The problem is that the contract does not give you any information as to how to calculate A, B or C. The contract basically says that A, B and C are whatever the bank calculates A, B and C to be at that time. The contract does not even tell you the manner in which ING will calculate A, B and C. This means that ING can change its mind how it calculates A, B and C whenever it wants.

Likewise there is no contractual requirement that ING be consistent in how it calculates A, B and C for different people even if the calculation occurs on the same day for identical loans. ING could tell Boomtown that he has to pay $50k to break and tell Joe Bloggs that he has to pay $30k to break and Boomtown would have no recourse even though Boomtown and Joe Bloggs have identical loans and broke on the same day.

My perception is that because ING can change how it calculates A, B and C whenever it wants, it can manipulate the process to make up any numbers it wants for A, B and C.

Even if the amounts cannot be quantified in advance, I expect ING to set out the mechanisms by which those amounts will be calculated. By deliberately hiding the mechanisms I consider that is engaging in abusive market practices.

Its perfectly appropriate for ING to charge people its economic loss if the borrower breaks a fixed contract with ING. It is not appropriate for ING to just make numbers up. I query whether this non disclosure by ING amounts to a breach of the Consumer Credit Code or the Trade Practices Act (eg misleading and deceptive conduct).

95% of consumers dont read the fine print of their finance contracts and don't understand this stuff. I do read it and I do understand it - and it really pisses me off when I come across shonky conduct like this from ING which is supposed to be a reputable institution.

Do ANZ / NAB etc at least properly include the break fee formulas? Or is it an industry wide practice to just make things up?
 
Last edited:
Westpac, ING or CBA have been given as examples here. None of these are 'dodgy one man bands', they're all AA rated lenders in Australia.

I've had clients break fixed rate loans with all of these lenders and have done it myself with zero economic cost at Westpac. The problem is if the lender sells your loan to a third party, then the ecomonic costs may change. I'd suggest that it's wrong for a lender to pass your loan on to another party without your consent, but their view is that it's their asset and they can buy and sell it as they please as long as they meet the terms of the original contract.

Every bank uses similar language and documentation when describing break fees from fixed interest rates and loan contracts in general. This is quite simply the risk that you might take when entering into a fixed rate loan.

I've heard a solicitors opinion that you'd be mad to sign a contract for a home loan as it's so heavily weighted in the lenders favour. If you don't sign it though, you don't get the money. Your choice.

I've heard reputable people on this forum state that if you time the interest rates properly you can get out of a fixed loan at minimal cost. As has been domonstraited, this logical advice is not always correct and unforutnately the average consumer has no way of determining what is correct.
 
boomtown said:
Do ANZ / NAB etc at least properly include the break fee formulas? Or is it an industry wide practice to just make things up?
Click to expand...
The formula in my contract with Westpac is pretty clear other than its reference to the "wholesale interest rate", to define the spread between the fixed rate and the bank's current cost of funding. Apparently this rate changes at the Bank's discretion and is not even published. I am also told it is not even available to "frontline staff" so I can't even do the calculation myself because they won't actually tell me what the rate is they are using to work out the fee! Other than working backwards from the result, which won't highlight if the bank has made a mistake. Very unhappy!

PT_Bear said:
As has been domonstraited, this logical advice is not always correct and unforutnately the average consumer has no way of determining what is correct.
Click to expand...

Thanks for the reply, PT. Does this mean you have no way of checking whether the bank is giving you a bum steer? Working backwards through the formula they have given me and the fee they have quoted, my guess is the wholesale interest rate they are using is circa 7%. In other words, you would only be free of a break fee if you fixed below 7%. Is there any way of telling if this even sounds reasonable?

crc_error said:
about a month ago I broke a 10 year fixed rate loan with CBA. I was 9 months into the 10 year rate and I was fixed at 8.90% (before wealth pack discount)

Their current 10 year fixed rate at the time was 8.94 so I didn't have to pay anything other than their $300 fee. 3 days later the fixed rate fell to the current 8.69% so I guess now i would be charged an exit fee should I had unfixed it now.

CBA were very fair.. but that is the benefit of going with a reputable bank, not a one man show outfit.
Click to expand...

Thanks for the response CRC. This is the type of response I would have expected from Westpac. I am fixed for three and a half more years at 7.25% and funding costs haven't dropped that much in a month! Their current 5 year fixed rate is 7.99% on a pro pack! Apart from the RBA drop funding costs are meant to have risen! To be told now that I have a big break fee at this rate just smells wrong. Time to escalate further and see what happens I think... will keep you guys posted.
 
Just had confirmation from another Bank employee that the Break cost for a $430k loan fixed for another three years at 7.25% is $4500 or so. I can't believe there would be a break fee at all with an IR that low and no-one at the Bank can give me any reasonable justification for it. With my variable rate at 8.7% this is certainly looking, smelling and sounding like a rort... :mad:
 
Low doc break fee scam

We just recieved the proceeds on friday from a property settlement. It was a RAMS low doc loan that was taken out in 2002 with a variable interest rate that was 1% higher than the going rate at that time. The loan was P&I and on settlement there was $240,000 to pay back. The break :confused: fee was in the fine print and even though we have had the loan for 6 years and the interest rate remained 1% above the variable as it was a floating rate we were charged $7000 :eek:

Lesson learned is never touch low doc loans and read every word before you sign any loan document. We now take all documents away and spend a week-end reviewing them before signing any new loan agreements.
 
I had a client call me this morning regarding breaking a Westpac fixed loan. Currently fixed at 8.25% (4.5 yrs remaining). The payout cost is approximately 3% of his loan amount.

The next time I see someone from Westpac, I'll be asking for a detailed description of how they determine 'economic costs'.
 
As a question...
when you went to westpac (for example) did you end up negotiating a fee or rate discount which was a bit better than the normal offer?
 
lukentel said:
As a question...
when you went to westpac (for example) did you end up negotiating a fee or rate discount which was a bit better than the normal offer?
Click to expand...

Nope - just fixed our loan at the prevailing fixed rate at the time.

Although as a pro pack customer you get 0.2% off their "normal" fixed rates but most would qualify for this. The pro pack deals with all the fees etc. In this context 0.2% wouldn't be all that material anyway?
 
PT_Bear said:
I had a client call me this morning regarding breaking a Westpac fixed loan. Currently fixed at 8.25% (4.5 yrs remaining). The payout cost is approximately 3% of his loan amount.

The next time I see someone from Westpac, I'll be asking for a detailed description of how they determine 'economic costs'.
Click to expand...

This is making no sense. I have another loan which is fixed for 4 more years at 7.89%. The payout cost for that one would be 3.9% of the loan amount! Can't get any decent answer out of Westpac on this.

If I went and fixed a loan today at the rates they are offering - 7.99% for five years on a pro pack and I broke it the next day they would then be turning around and charging me >4% of the loan amount! On the basis of the "true economic cost"!

I don't think so! :mad:
 
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