Selling during a fixed rate loan period

[The Chaser]

Hi All

We have an IP that we are considering selling, but unfortunately the loan with NAB is currently on a 2yr fixed rate until April 2014. The fixed IR is 6.29% and we are on the Choices package. The loan is over $500k and the current variable interest rate on a Choices package appears to be lower at 6.08% (not sure what the SVR is without the Choices package discount?).

What happens in regards to exit/penalty fees if we sell? I always thought that if you break a fixed rate to sell the IP (or refinance), the bank hits you with high exit fees to recover the difference between the fixed rate and the (usually) higher variable rate. In this case it would appear that our fixed rate is higher than the comparable variable rate applicable under our Choices package. Wouldn't this mean that there would be no or minimal exit fees as the bank hasn't actually suffered a loss?

Any feedback would be great. Thanks.

Angela

 

[tobe]

In theory that is correct, but in practice, get a payout figure from the NAB and let them do the sums (which were outlined in your mortgage docs).

Note, the break costs for an investment can be offset for tax and capital gains, so its not nearly as bad as you thought (im no accountant, check this with yours)

 

[possumcreek]

Wouldn't they want at least the interest they would have earnt over the next 19 months?

 

[Rolf Latham]

Hi All

We have an IP that we are considering selling, but unfortunately the loan with NAB is currently on a 2yr fixed rate until April 2014. The fixed IR is 6.29% and we are on the Choices package. The loan is over $500k and the current variable interest rate on a Choices package appears to be lower at 6.08% (not sure what the SVR is without the Choices package discount?).

What happens in regards to exit/penalty fees if we sell? I always thought that if you break a fixed rate to sell the IP (or refinance), the bank hits you with high exit fees to recover the difference between the fixed rate and the (usually) higher variable rate. In this case it would appear that our fixed rate is higher than the comparable variable rate applicable under our Choices package. Wouldn't this mean that there would be no or minimal exit fees as the bank hasn't actually suffered a loss?

Any feedback would be great. Thanks.

Angela

Id guess the payout will be in the range of 10 to 20 k.

the bank is taking a significant bath because they have "pre paid" their arrangement to their funds provider not at 6.08 but at the rate at the time of funding plus a margin.

Reason for sale ?

maybe you can do a port ?
t
arolf

 

[The Chaser]

...Note, the break costs for an investment can be offset for tax and capital gains, so its not nearly as bad as you thought (im no accountant, check this with yours)

Hi Tobe. Thanks for the reply. I hadn't thought of your point above, so that does make me feel a bit better.

 

[Peter_Tersteeg]

Wouldn't they want at least the interest they would have earnt over the next 19 months?

That plus a bit more. I've seen a few break costs over the years. They're often as much as double what the interest difference would be.


Fixed loans are generally fully portable and NAB is no exception. If you've got other properties, you can port the loan over to another property and reduce the variable debt on that property by the same amount. You could also do this with a property being purchased but they would need to both settle on the same day.

 

[Rolf Latham]

You could also do this with a property being purchased but they would need to both settle on the same day.

many lenders that have a banking licence can do a TD as temp security and the settlement can be out by a bit.

Costs a little though : ( coz the TD rate is less than fixed mortgage AND the mortgage still needs to be paid

ta
rolf

 

[Marty McDonald]

Think of it like this, they have to relend the money after you break at say 5.5% (1 year fixed rates). This is not how they work it out but gives you an idea that they are in a loss making position.

They actually reference their current cost of funds rate when workling out their loss which has traditionally been around the same as the RBA cash rate (3.75% currently).

 

[Brady]

As stated before... what are your plans?

You maybe able to to work around it by doing a security substitution/portability through purchase of another property settling on the same day, or putting funds into fixed term deposit and using that as security.

As always do your own sums work out what is best for you.

 

[tvadera]

Hi,

Breakcosts or exit fees for fixed (or swap thats what banks call it) is calculated based on:

Net Present value of cashflow (NPV)
Yield curve for the duration of loan
Fixed rate
Interest frequency
Liquidity Margin
Sales Margin


Its difficult to understand as to how its calculated, so best call NAB ask for an indicative figure and take it from there.

Regards,

 

[The Chaser]

Hi everyone

Thanks for the many replies and the explanations of how banks calculate fixed rate break fees. We have various reasons for looking at selling this IP but not necessarily to substitute it with a comparable value deal, so portablility wasn't really likely to apply for us.

I have now spoken to NAB and for those who are interested the fixed rate break fee on a $584k loan was $9,085 (at today's date of course). There was the usual $350 title discharge fee and the pro-rata interest adjustment for this month. Under our loan contract there was meant to be a further $600 exit fee if the loan was paid out in under 4 years. However, as many of you would no doubt know, loan exit fees were retrospectively abolished by many lenders in recent years.

Technically it is also possible for us to port our loan (had this been of interest) - NAB refer to it as a Product Swap. However it would require a same day settlement.

Hope that helps for anyone else like me who wasn't quite sure of the economic effect of breaking a fixed rate if selling. Off to do our sums now...thanks again for the replies.

Angela