Loan Tip: Structuring a Fixed Loan to Reduce Break Costs

A loan structuring strategy to potentially help reduce break costs is to split a fixed loan up into several smaller splits to enable staggered breaking of the fixed loan term if need be. If you don’t end up breaking there is little downside, but if you do you could save a fair bit of money.

Note that this doesn’t really work if you are needing to pay out all splits because of a sale or a refinance. It only works where you need to break part of the fixed loans.

Example

Bart has going to take a punt on a fixed loan. He is unsure of how much savings he will have over the coming years so he gets his $300,000 fixed loan as 6 x $50,000 and keeps $100,000 variable.

After 1 year Bart saves well and his offset is now $100,000 so any further savings have no where to go. Bart could contemplate breaking one of the $50,000 fixed loans so that it now becomes variable and get an offset and start filling that up.

Had Bart used one big split of $300,000 the break would happen on the whole amount which would have had a break fee of about 6 times what he paid on the $50,000 split. He also has the benefit of the remaining splits totaling $250,000 remaining fixed which helps manage rate risk.

If Bart saved up enough to fill the offset on the $50,000 split he could then break another fixed $50,000 loan.

At this point further time would have passed which could mean lower break costs incurred on this split.



It also happens that Bart’s opinions on rates has changed and he wants to take evasive action by breaking and refixing at different rates. He could also do this in stages.

 

come time to refinance, Bart will be involved in plenty of paperwork. He will have to go to his netbank, get a print of each loan and wont be able to use the mobile app. Bart will realise that on a 300K loan he should have just paid the circa $300 in exit fees.

Of course I am kidding but Bart better not be using CBA.

 

why do you say that?

 

thanks for the useful tip @Terry_w

Does this Tip apply to existing fixed loans, or only to newly created fixed loans? I am with CBA and have a fixed loan. If I wanna break into smaller chunks (with the same loan period and rate), would CBA (or any lender) honour that request?

And, does it matter to a lender (for loan splitting purposes) if it is a fixed P&I / IO for a PPOR/IP loan?

many thanks!

 

Its generally not possible to split a fixed loan without breaking it, with most lenders.