Outrageous break fee?

[Belbo]

Witch bank advised me today they want us to pay a break fee of $ 15,000 to let me out of a $586,000 5yr loan fixed at 7.15% until May 2012.

I asked, how do you work that out?

The answer was that the current fixed rate for a similar loan is 8.1% and that is what they work off.

I said, but aren't you getting out of a cheap loan so you can lend the same money at a higher rate - Shouldn't you be paying me $ 15,000?

The answer was, the computer says 'no'.

Can anybody offer me enlightenment here?

Belbo

 

[aaarghhh]

Pay the fee and get on with your life.

 

[luckyone]

I thought normally if the variable rate was higher that you didn't have to pay a break fee, so it seems a bit weird to me. Maybe speak to someone higher up in the bank?

 

[StuartW]

Normally they compare the rate for the remaining term against your rate. There are 2 years left and the 2 year rate is 7.09% which is lower than your rate. I'm very sceptical about fixed rate break fees as they can vary by (sometimes tens of) thousands of dollars between banks (on similar rates and terms) - I'm positive its profiteering.

 

[Belbo]

Yep, they're profiteering I reckon. I've just received a phone call from somewone who knows that agrees.

Turns out my new defacto bro-in-law is working on exactly this modeling for another major bank right now, says I have a right to ask for a written explanation of their method of calculating the break cost, and he'll have 'his boys in treasury' crunch the figures.

If it stinks it's going to the banking ombudman, and I'll pull my other $1.2M of un-fixed business out of the the rotters just to teach them a lesson.

Belbo

 

[alexlee]

If it stinks it's going to the banking ombudman,

Which will achieve, what, exactly?

and I'll pull my other $1.2M of un-fixed business out of the the rotters just to teach them a lesson.

They must be shaking in their boots. And where will you be taking that business to?

You're a number. Get over it.

 

[tom32]

Normally they compare the rate for the remaining term against your rate. There are 2 years left and the 2 year rate is 7.09% which is lower than your rate.

Makes sense but this is only .06 difference (7.15-7.09) over 2 years or approx .06% x 586k x 2years or about $700.00 you owe the bank. (Before someone says but I didn't do compounding interest calculated monthly, sure it might be about $20.00 more than this!)

OF course you expect to pay a hefty break fee to break if interest rates have moved against you, but surely if anything you should be able to profit from this as you made the right bet, interest rates would go up and you locked in low? I know they are not going to pay you but it seems ludicrous you have to pay them!

 

[JIT]

I had a similar experience recently when quoted for breaking from 6.80% fixed to go to 7.05% variable.

I was quoted $500 just 2 months ago, $zero recently, 2 days later $20000, later that afternoon $5000, and then 2 days later $2500.

I was later told that the economic costs were calculated by taking into account the cost of funding when the loan was settled compared to the cost of funding now. As the cost of funding had decreased, my economic costs had thus increased... ?

I'm still waiting on a reply back about this as it didn't make sense to me?

I think there's some profiteering going on here too!

 

[Belbo]

Yeah, Alexlee, you're right. It must be tough being as clever as you.

 

[alexlee]

Yeah, Alexlee, you're right. It must be tough being as clever as you.

Nothing to do with being clever or not. I try to use my time efficiently, choosing battles I can win. Do you honestly thing anything will happen if you complain to the banking ombudsman? What will pulling the rest of your business out achieve? Why waste the effort?

Now, if I were you, I would *threaten* to pull the rest of my business and try to get them to reduce the break fee. Might not work, but at least that would have a chance of success.

 

[Dazz]

I'll pull my other $1.2M of un-fixed business out of the the rotters just to teach them a lesson.

Teaching banks a lesson with 1.2m ??

Mate, they won't even turn up to class unless you chuck another 2 zero's on the end.

 

[Ridin-High]

Teaching banks a lesson with 1.2m ??

Mate, they won't even turn up to class unless you chuck another 2 zero's on the end.

agreed. -_-;;

 

[Bigtone]

Teaching banks a lesson with 1.2m ??

Mate, they won't even turn up to class unless you chuck another 2 zero's on the end.

they r more concerned with the banking ombudsman than the loss of that business, they have more business than they need so won't care about losing that.

I have however seen banks change attitudes big time over the threat of ombudsman as staff r told to avoid this whenever possible.

If i was u i would ask for copy of calculator and formula they r using and compare that with the formula displayed in ur loan docs and see if there is a discrepancy, if so u will win if not u r stuffed,

 

[craigb]

my break fees were , $47,000 and another one of $27,000 nasty stuff, SOooo do you feel a bit more enlightened now ,

 

[Rolf Latham]

back on direct topic

Who is the lender ?

What you are speaking of and have been quoted is most likely an economic breakcost of the fixed rate rather than a deferred establishment fee per se.

I dont know the full circumstances , I would say the lender is likely not "profiteering" but more likely asking you to keep your side of the contract.

The lender would have bought a sum of money at rate X. Rate X will not have been the variable rate on the day.

They would have sold you the money at rate Y.

The differential would be Z

If the contract would have run its full term, then the lender would have made its margin on Z.

Now, the lender is insisting that you pre pay Z.

ta
rolf

 

[Peter_Tersteeg]

Money from fixed rates doesn't come from the RBA, thus the current variable rate has no bearing on the exit costs.

Current fixed rates are a better guide, but as the source of the funds a few years ago can be very different to the source of the funds now, this may not be accurate either.

 

[Token Funder]

they r more concerned with the banking ombudsman than the loss of that business, they have more business than they need so won't care about losing that.

I have however seen banks change attitudes big time over the threat of ombudsman as staff r told to avoid this whenever possible.

If i was u i would ask for copy of calculator and formula they r using and compare that with the formula displayed in ur loan docs and see if there is a discrepancy, if so u will win if not u r stuffed,

Ombudsman issues around fixed rate break costs are pretty straight forward.

Was the break cost and the method of calculation disclosed in the conract?
Is the method a valid estimate of the costs/risks associated with the transaction?

As you might imagine, given where rates over recent times, every lender in Australia has had a plethora of borrowers trying it on with the Ombudsman around break costs, self included.

Haven't lost one yet.

As was highlighted earlier, locking in a borrower for a fixed rate has a cost (if you hedge) or a risk (if you don't). A borrower changing their mind if the world pans out differently to their expectations and wants to reneg on their end ofthe deal, will be asked to pay those costs.

 

[lizzie]

we had a property settlement today, and this thread made a minor stress moment as we are only 18mths into a 3 year fixed term.

i had assumed there would be no break costs as the rate was 5.19% and they'd be glad to get rid of us to relend at a higher rate. i didn't realise it was based on the banks borrowing rate at the time.

anyhow - pleased to advise there were no break costs. and 25% more in the bank than was expecting after payouts.

sorry to those of you who have been stung.

 

[Pushka]

It isnt an issue of what the current interest rate is, versus your interest rate. The bottom line is that there is a signed contract for say 5 years, in which your interest payments add up to a certain amount over that period. Guaranteed Income. And that is your break fee.
I believe you can claim it in the current financial year though.

Ours was $45,000 about two years ago - and it was all there in the fine print. Havent dared ask since.