Newbie - Understanding Loans

[andrewdc]

My Situation...I've got a variable IO loan with Mac bank with a 5 year "limit". The property the loan is secured against has shown some appreciation within a year of purchasing it and I want to sell it...I've contacted the Bank and they are telling me that I will have to pay break fees etc (not sure how much yet..) ...

AM I MISSING SOMETHING HERE?

Is there any way of avoiding the early break fees...How do people who trade/turnover IP properties avoid paying the early discharge/break fees associated with the loan especially if they do not have additional property to offer up as security...

Or is this just a cost of doing business?

 

[Ms Jade]

Firstly, are you sure that once you pay agent's commission, CGT and add in all the costs of purchase that you'll walk away with a profit? Well done to do that over the past 12mths.
To your main question, you'll need to check your loan documents. You will find that there are certain fees for getting out of the contract, and I think with Macquarie if it's <5yrs since settlement you will pay something (I think after that it's maybe $150). I suspect that at 12mths you may be up for a couple of thousand. The way to avoid early break fees is to plan before you settle. Not all banks are as bad as Mac & I'm sure there are some securitised lenders who are worse. People who trade properties would make sure that they only get finance through institutions with minimal break fees. That, or they add it onto the costs they need to recoup from the property.

 

[Peter_Tersteeg]

Almost all lenders have a break fee of some description, you'll find it in your loan offer contract. It's also worth asking the person setting up the loan what the break fees are before you agree to it.

Most balance sheet funded lenders (lenders who fund from their deposits) have a flat fee structure, usually less than $1000 for the first 3-5 years. Most securetised funders calculate the break cost as a percentage of the original loan amount.

The only effective way to avoid these fees when you sell is to purchase another property and transfer the loan to the new property. Both sale and purchase usually has to happen on the same day.