If RBA cut rates how does it impact the break fee

If Im in year 2 approaching year 3 of a 5 yr fixed rate and maybe sell my house in the next 4 months... what is the impact of the RBA cutting rates on the break fee. Is it better for me or worse for me. I think Im on 5 yr fixed rate of 4.55%.

Im only asking a general opinion as I dont understand the calculation of the break fee.

thanks

 

The break fee is calculated by the difference between the banks 'cost of funds' and your fixed rate over the remaining fixed rate term.

The trouble is, banks don't publish their cost of funds, its commercial in confidence.

It's assumed their cost of funds will change when the reserve change their rates, but there are other factors at play as well. The price they pay depositors, the cost of securitised funds from overseas, etc etc.

 

you can kind of work it out though with 90 day bbsw ~1.8% + treasury cost between 85 & 125bps depending on the bank - market rate transfer price (mrtp / cof) @ 2.8-3.0% + yield.

best way to look at it is if the rates went down, it'll cost you more money - the bank is holding money in your favour at a higher rate, in current market conditions it can't lend to someone else at this higher rate because the market indicates lower pricing therefore you get stung the economic cost to break (eg: loss of banks' income ).

 

Thanks for explaining that Dave. I can thus hope that rates go up...

 

I doubt we will see anymore cuts with low employment and low au dollar among other things. if anything we will see more rises soon.

 

Call the bank and ask for an indicative break cost estimate. A free service and very factual

Then consider the tax rules. If its an IP and you break now its tax deductible. If you break when settled its a CGT deductivle and 50% of the benefit is lost

 

Give your bank a call. I was surprised to get an answer within a couple of minutes over the phone.