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Break costs if interest rates rise

Discussion in 'Property Finance' started by Humphrey, 21st Jun, 2016.

  1. Humphrey

    Humphrey Member

    Joined:
    26th Jun, 2015
    Posts:
    11
    Location:
    Sydney
    Pre-GFC, I fixed a mortgage rate. When interest rate subsequently dropped, I was faced with some exorbitant break costs which seemed to increase the more that interest rates decreased.

    I'm wondering what could happen in the reverse situation. For example if I fixed a mortgage at 5%, and then the variable rate increased to say 7%, would I be looking at anything like the same break costs? (Assuming that I had to break)

    Does anyone have any specific experience of this?

    tia.
     
  2. Simon Moore

    Simon Moore Mortgage Broker - Melbourne Business Member

    Joined:
    4th Mar, 2016
    Posts:
    231
    Location:
    Melbourne
    Hi Humphrey,

    If you fix and then interest rates rise there are generally no break costs, there may be some costs associated with your loan, such as discharge fees (a quick call to the bank should clarify that for you). In fact, back in the day if you fixed, and interest rates subsequently rose, the bank would pay you money to break the fixed rate!

    Hope that helps mate :)
     
    Humphrey likes this.
  3. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

    Joined:
    14th Jun, 2015
    Posts:
    1,173
    Location:
    Adelaide, SA
    Generally if it's an upward rise it's a nil charge - break costs are to bridge the gap between cost of funds changing from when it's locked vs exit. If rates have risen generally there is a positive benefit than anything for the bank.

    The same goes for rates at the same - ie if you locked your rate at 4%, and three months later the rate is 4% most lenders will do a nil break fee. In reality we're in a turbulent environment with fixed rates in particular, so the chances of being indefinitely on the same rate as the rate on offered is unlikely.