Move to new rate or not

[Burramys]

In early-2007 I took out a $250 000 mortgage, IO, 25 years, AMP. It was fixed and I refixed, expiring early 2016, at 5.99%. Not good compared to current rates. A year ago I enquired about paying off the mortgage early. I was advised that the early repayment interest would be over $6000. My intention is to sell the property in 12 months, say 9 am on 1 July 2015.

In the meantime, rates are way down on 5.99%. I could stay with AMP and get a drop of about 80 basis points on the AAPR. The early repayment interest may be acceptable; I have yet to ask.

My main concern is that by 2015 the current mortgage will be eight years old, with a lower early repayment interest. The early repayment interest "clock" (for want of a better term) may start at zero with a new mortgage. So while a better rate can be obtained, I'm unsure if it's worth it for a year or so of 80 BP lower rate. Any views?

 

[Jamie M]

I haven't crunched the numbers but on the surface it doesn't seem worth it - not if you're selling soon.

Cheers

Jamie

 

[Peter_Tersteeg]

Some quick back of the napkin math suggests if you refinance to a rate of 4.99% (1% lower), over the next 2 years you'd save $5,000 (assuming it's exactly 2 years remaining and rates don't change).

It'll cost you $6,000 to exit. Not exactly cost effective.

It's hard to say if you're better off existing now or when you sell the property. On the information that is known, I've rarely seen a case where it's more cost effective to pay the break fees. If you expect rates to drop however, you might be better off, assuming the rates actually do drop.

In other words there's no easy answer.

My general observation is that you're better off not to fix in the first place, you're also better off not to break the fixed rate if you ignore the first observation. I've also observed that there's plenty of exceptions to this as well.

 

[Burramys]

Thanks. You have confirmed what I thought was the case - probably not worth it and hard to say. I'll leave the mortgage as is.

I mentioned the "clock" resetting. Is this so? That is, there may be a fee of, say, $5500 for breaking the current mortgage in in mid-2015 as the mortgage has 17 years to run. If I got another loan now and sold in a year, would the fee be higher as the mortgage has, say, 24 years to run?

 

[Chris B]

Thanks. You have confirmed what I thought was the case - probably not worth it and hard to say. I'll leave the mortgage as is.

I mentioned the "clock" resetting. Is this so? That is, there may be a fee of, say, $5500 for breaking the current mortgage in in mid-2015 as the mortgage has 17 years to run. If I got another loan now and sold in a year, would the fee be higher as the mortgage has, say, 24 years to run?

The early repayment fee is due to breaking the fixed interest term (and based on how long is left on the fixed term), not based on the 17 years left on the loan. If you are going to switch, you just need to make sure the loan you switch to doesn't have a penalty for repaying early (e.g. often seen with special offers/honeymoon rates) but if you know that you are going to sell in 12 months, I can't see any point breaking the fixed term now as the penalty will reduce over the next 12 months and the benefit of being on a lower rate is unlikely to save you more than about $2500 in that time.

 

[Burramys]

Chris, thanks. I'll leave things as is.