Breaking fixed loans and costs

Discussion in 'Loans & Mortgage Brokers' started by dabbler, 28th Apr, 2017.

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  1. dabbler

    dabbler Well-Known Member

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    Thought it would be good to have a thread to discuss fixed loans and breaking them, whether to talk about theory, your experiences, or knowledge.

    I cannot say too much, have not found any good info on this subject.

    I will start by asking if anyone knows, and I understand each lender is different, but generally, if you took a 5 year fixed loan at 4% and variable has risen by 1% when your in year 2 & you decide to break, the costs should be low or almost none ? As opposed to variable rates dropping ?
     
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  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It is basically the loss that Tha bank incurs but letting you out early.

    If you fixed at 4% and rates are now 5% there won't be a loss as the bank can relend the money at a higher rate. So any fees would be minimal.

    But if rates dropped to 3% they would be losing 1% per year for the remainder of the fixed term if you broke
     
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  3. Zoolander

    Zoolander Well-Known Member

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    I had an IP fixed at 5.03% interest only for 5 years with NAB. Was servicing it fine but realised I had money to put into offset which the fixed rate cant accomodate. Broke out of it at a cost of $4.7k
    The new rate is 4.45% and I get to offset a big chunk of the loan, pretty much make up that $4.7k in a couple of months and ride the rest of the IO period with lower repayments. Boost cashflow for the next couple years until the loan switches to p&i

    Key lesson for me was: if you have excess funds that can go into an offset, dont fix that loan completely.
     
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  4. Zoolander

    Zoolander Well-Known Member

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    Hey @dabbler , I only have experience with NAB asking about break fees for fixed terms ranging from a year to 5. The break fees do scale down as you get closer to maturity- the call centre folks explained that the calculation takes into account that and a host of other factors like rate movements.

    I had one case where a 2-3yr fixed loan had a $0 break fee because a "lucky bug in the system". I suspected the actual reason is that the fixed rate is unprofitable to the bank, and getting me onto variable would be more appealing for the remainder of the term. cant remember the rates from that time but that was the vibe I got. would be interested if anyone else has come across this $0 break fee scenario.
     
  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Break fees are affected by a variety of factors

    - Rate for the remaining term based on the bank bill swap market
    - Current discount variable rate as a discount factor
    - Spread for bank margin between its product and market rates (eg 1 year ago margin on a 5 yr swap was 2% and now a 4 year swap is 1.5%). You need to pay the bank the agreed spread not the current spread

    The bank "loss" is calculated and then discounted by the variable rate to adjust to present dollar values. (I used to work in bank treasury as a dealer)

    Some banks waive at a threshold, others if your refinance and to a threshold and if there is no cost then its not a break fee BUT some lenders do charge a fixed fee for loan variation or early payout.
    Once upon a time banks used to PAY the customer for a break benefit if rates rose. After years of declining rates where they only ever won they didnt like that idea so they all copied each other and now allow annual additional repayments of $X with no break fee but dont pay any benefit. Its like a casino - house always wins.

    The Book Fast Money (4) by Edna Carew includes formulas and examples of all such products. Last edited 1998 so its hard to find
     
  6. dabbler

    dabbler Well-Known Member

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    A lot of them allow an extra payment into the loan by a set max amount, but it won't change payment per month during fixed term.

    You also can keep one loan or one portion of a loan on variable if you will def get excess income, I intend to allocate any extra money or loans I can get, so offset on one acc for the cash account transactions is enough.
     
  7. Zoolander

    Zoolander Well-Known Member

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    Yep nab allows for $20k extra repayment over the life of the fixed term. its not much
     
  8. dabbler

    dabbler Well-Known Member

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    If you have a dozen or half a dozen loans that should be plenty ?

    You could always just go and buy more, that is my thinking anyway, never going to have lot's of cash sitting around.

    Keeping one variable may work better for those expecting to have cash sitting around.
     
  9. Possumcreek

    Possumcreek Well-Known Member

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    Hi there newbie here. First post. :)
    I was surprised to find break fee only $29 to break 2-year fixed rate with 14months to go on 164K with ANZ Breakfree. I suspected rates had gone up and it was at the bank's advantage to allow the break however the rate's at 4.19% for 2-year fixed I/O down from 4.44%.
     
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  10. Zoolander

    Zoolander Well-Known Member

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    Depends on personal situation. Im planning to turn an IP into PPOR so having cash gives options to pay down that loan via offset, or pick up something unencumbered during a down cycle. Cant see anything that beats parking in an offset as rates rise at the moment.
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Consider the tax aspects in that case. I have written a few tips on this in the tax section.
     
  12. Zoolander

    Zoolander Well-Known Member

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    Thanks Terry. I remember coming across that series. Definitely worth a reloo
     
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  13. dabbler

    dabbler Well-Known Member

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    But that is what I said, leave one on variable with offset, you just made my case cause you would do it on the one you will make the PPOR :)

    You need to go to many more meetings and read a lot more before you go using that cash to buy unencumbered :)

    PS there will be units galore most likely, not too far down the track, Bris, Mel and less in Syd
     
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  14. datto

    datto Well-Known Member

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    Now say you have a property mortgaged with a fixed rate loan.

    Can you get that property released from the mortgage and then offer the bank another (unencumbered) property of similar value without getting slugged too much?
     
  15. dabbler

    dabbler Well-Known Member

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    With most of them, yes, you can swap security if security is satisfactory of course, just ask your lender.
     
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