Fixed rate break cost

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From: Vicki .


Hi

I am almost 2 years into a 3yr fixed IO loan and am selling my IP (in partnership with another). My mortgage broker has informed me that break costs on the $230K loan @ 7.6% will be $9,600. Eeekkkk.

I understand why there are break costs but is this amount "normal" for 14mths early exit? Or have I signed up on a dud deal. I have been happy with the broker and intended using them again but didn't want to be taken for a ride again if this was the case here.

Any clues?
Vicki
 
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Reply: 1
From: Terry Avery


Hi Vicki,

$9,600 sounds a bit high. Break costs are usually calculated by taking the
difference in interest rates that the bank loses over the 14 months. If
current rates are 6% then I calculate the interest difference to be $4,293.
Then you would have administrative expenses as well. Did your mortgage
broker give you the calculations so you can see exactly how it is worked
out?

Cheers
 
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Reply: 2
From: Rolf Latham


Hi Vicki

ALL fixed rate loan will have "penalties" attached to them.

They are not really penalties in that sense. A fixed loan is a contract for a fixed period, in your case, three years at a fixed rate, meaning that if rates go up, you are protected.

The lender has "bought" the money for that period, and the payout figures are an economic cost recovery. Effectively what you are doing is prepaying the interest differential for the remiander of the outstanding time.

Sounds to me like you are on a loan with some extra disincentives, like two months interest break penalty + economic cost + discharge costs.

Can you sell on deferred settlement with deposit released to vendor ?


Ta

ROlf

Rolf
 
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Reply: 2.1
From: Vicki .


Thanks for your response.

Current interest rate with this Broker is 5.75% so it's quite a variation from 7.6%.
I will get a break down of costs though.

Rolf your idea of delayed settlement is a good one but will require me putting a tenant in there while we "delay". Worth a thought though.

Cheers
Vicki
 
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Reply: 3
From: Sarah Verrone



G'day Vicki,
I was in your situation once.
I wrote several rather direct letters to the bank and finally they only charged me half of the penalty amount.
Sometimes the shouting and stomping feet
tactic can work.
I also contacted the banking ombudsman.They
were of no use but at at least the bank knew I was determined.
However I did mention that I would remain with the same bank and apply for my new loan if they reduced the pay out penalty.
Otherwise I was never to return.
Good Luck Vicki
Bye Sarah
 
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Reply: 3.1
From: Vicki .


Thanks Sarah for the idea.
No harm in asking the bank to reduce the penalty and they know I've another in the pipeline - maybe a bit of leverage?
Cheers
Vicki
 
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Reply: 3.1.1
From: Les .



G'day Vicki,

Be sure to read Jan's "Story by Story" - look at story #75. The bloke in the story came out of it pretty well by preparing his moves before meeting with his Bank.

Regards,

Les


- "Eschew Obfuscation" - ;^)
 
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Reply: 3.1.2
From: Adam Randall


Hello
I had to pay break costs about 5 months ago from Bankwest. Initially they quoted me a break fee of $10,000 (I was fixed for 3 years at 7.95%). On the day it came down to about $4500, I don't know why this happened, I expected to pay the 10G. My current interest rate is 4.4% (honeymoon) so I have saved way more than $4500 in the last 5 months ($450K loan) I have also got the type of loan I want, and I can convert at the end of 6 month honeymoon to fixed if I want. I have always come off worse when fixing my loans (I have done this twice) I fixed for 3 years at 10.95% thinking interest rates could never get any lower (early 90s), I did the full 3 years with that rate, then recently I fixed for 3 years again when interest rates went up briefly, they then proceeded to nose dive, so thats when I broke my contract 8 months into the 3 years.
You think I would learn from this, yet I noticed a sign at my bank with a fixed rate of 6.05% for 3 years . I am feeling much temptation, my honeymoon rate is over in about 1 month and I can change over for free (for free).
regards Adam
 
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Reply: 3.1.2.1
From: Rolf Latham


Win some lose some Adam I suppose.

Some tempting offers arent there !

Well done with the reduction on your break costs.

Ta

Rolf
 
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