fixed loan break cost calculator

Do WBC have a calculator for their break cost other than their advice that:

"The break cost is: ∑[i*Badj +Badj -Badj]* dƒt -(CB-UT)-∑[i*Bnew +Bnew -Bnew]* dƒ t-1 t-1 t t-1 t-1 t t -(CB-P) "
https://www.westpac.com.au/content/...-things-you-should-know-about-break-costs.pdf

The above formula isn't exactly user-friendly for non rocket surgeons

 

I don’t think so. We found their break costs very expensive. If you call them they’ll tell you.

 

Formulas are only good if you have numbers to plug into them. dft for example is based on current wholesale interest rates - only the Bank knows that information accurately.

Banks can tell you the break cost fairly quickly.

 

Lenders don't give out their fixed fee break calculators.

 

Correct... even if you have the calculator you won't be able to calculate the correct answer as you won't have the full picture on the variables.

 

I just looked at the link:



Looks pretty simple. Just ring and ask for the 'zero coupon discount factor' at 'period t' and plug it into your hand held calculator!

 

The only way to determine the break cost is to call the lender. They'll give you a figure for that day only.

I have discovered a shortcut that gets you close though. Figure out what the savings you would make over the remaining loan term. Double that figure. That's usually close to the break cost.

 

savings compared to discounted variable rate or another fixed term of the remaining duration?

 

@JohnPropChat I've generally compared this to the variable rates available at the time, but they're usually fairly close to the fixed rates at any given point. It's really just an observation I've made for both myself and client's fixed rates. There's no real science behind it.

 

Overall I think its bad for the consumer they make it difficult to calculate and it would be transparent if they published their calculator for the consumer to use.

If the powers that be want us to #getabetterrate then steps to increase transparency like this would be a start.

 

The calculator is one thing. That the theoretical calculator. However in truth the bank bases its break cost on a bank bill swap rate and futures market for bank bill swaps. And applies a margin to "market" and its pretty heavy.

I used to work for a major bank Treasury and we set retail break costs at at least 1.5% on top of the prevailing bill rate for that same term if it was something different to usual futures periods we could have added a further 1%. The discount factor at present is likely 0.01% so calculating a break cost can be pretty simple as a rule of thumb.. As there is only one price maker in a break cost so you cant expect them to be generous. If you dont like it = tough luck.

Warning : Dont base it on comparing the present fixed rate with a new fixed rate for the remaining period. You cant buy and sell and get the same rate. The bank spread will be a factor. Its probbaly only applied once ie not to both buy and sell. And they are the market. Typically add 1% or more.And a 0% discount rate (df)

So if you have three years left on a fixed rate loan at 4% and the bank offers fixed rates at 3% for that term you can expect to break at 2% and then its 3 years x 2% (difference between 4% and 2%). There are some terms more competitive than others eg 1, 2 and 3 year breaks.

Break costs vary by the day.

I can recall when a break benefit could be received. Nobody does that and its been a long time since it worked anyway. Now they suggest that they offer better conditions which allow limited advance repayments etc. I think thats as believable as beating a casino.

Why cant banks agree on a standard ? - That would be collusion.

 

It would create a lot of headaches for the banks to do this.

The formula is available with some lenders. I studied higher maths through high school and university and I can't understand it (granted I haven't tried very hard). Even if you did understand it, there's a lot of variables to enter into that formula.

Some of the figures would be unique to the individual borrower and to the lender. They'd likely have commercially competitive reasons to not want this information to be publicly available. They probably don't want their competitors to know who much they paid for a particular traunche of funds on a particular day.

The best solution is likely the one they give you. Call them on any given day and they'll get back to you very quickly with the payout figure.

 

Trouble is I've been on hold for 1 hour 52 with WBC...and my broker takes 7-10 days to reply to an email

 

Westpac arent coping well. My fixed rate ended 6 weeks ago. And is still a fixed rate. WTF. They tll me it will be backdated.

 

Unfortunately your broker can't really help with this question anyway. I also hear your pain about calling banks right now. They're focused on processing hardship requests and diverting a lot of resources to that.

 

Thanks for the explanation Paul. I’ve got quotes at various times over the years with diff banks and it’s always uneconomical. Finally had some success with WBC last week. Break fee of ~$500 on a $50k loan fixed at 4.29% with 18 months remaining. The customer service rep commented she was surprised with the amount. The day really days matter with this black box pricing!

 

Except that it currently takes about 2hrs on hold (CBA) to eventually get that figure.

The other bank (Qudos) returned to me on this in about a week with the figure (emailed back to me). Though that figure was valid for entire week since received.

 

It tooks me 2.5 hours with NAB to be told a break cost of $13k for my fixed loan (4.09% with 20 months remaining)