Penalties calculation for breaking a fixed rate loan early....

Discussion in 'Property Finance' started by Keentolearn77, 6th Dec, 2018.

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  1. Keentolearn77

    Keentolearn77 Well-Known Member

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    Wondering what is generally the expected hit - regarding early repayment penalties / early repayment interest adjustments...
    The difference between the fixed rate and the variable rate is less than 0.25%
    If the fixed loan is to be broken / early / refinanced say 6 months before its fixed period was due to finish.
    Does the bank normally expect / demand the 6 months of Principle & Interest payments to be paid...
    ie: monthly repayments at $3k * 6 months = $18k of repayments
    OR
    Is it moreso just paying the % of difference in the interest rate between fixed & variable
    would I be paying just $500-$1000 based on the difference in the interest rate between fixed & variable
     
  2. Property Twins

    Property Twins Mortgage Brokers - Australia Wide Business Plus Member

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    Is the current fixed rate for the same term higher or lower?

    Have you called the bank to ask what your break costs would be?
     
  3. Keentolearn77

    Keentolearn77 Well-Known Member

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    The rate we are getting fixed is slightly lower than variable.
    Will be calling the bank tomorrow re break costs, just wondering until then if anyone generally knew the rules...
     
  4. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    Someone posted the formula that one of the banks use recently.
    You would need a university mathematics education to understand it.
     
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  5. Ian87

    Ian87 Well-Known Member

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    Phone them, I did this earlier this month got the figure straight away. It’s generally just the difference between current interest rates and your interest rate. Depending on when you fixed their current interest rate may well be higher so your payment could be negligible.
     
  6. Zepth

    Zepth Well-Known Member

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    It’s actually the difference between the wholesale swap rate on the date your loan was started and the wholesale swap rate on the day you terminate.

    This is an important caveat as the wholesale rates change daily while the advertised rate does not.

    In my case while the fixed rate was lower than mine when I broke the fixed term I paid almost no penalty as the wholesale swap rates were climbing steadily in the background at the time. The reverse can also be true causing a higher than anticipated break cost
     
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  7. Ian87

    Ian87 Well-Known Member

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    That’s what I meant ;) my general gist was the break fee may not be that much.
     
  8. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    The bank uses bank bill swap rates and applies margins then uses a net present value calc to discount the future payout for the fact its being paid today. At these rates its not a major factor esp since the bank will discount at 0.01% in many cases since its not bound to pay interest. Some lenders have a break cost minimum eg $500 and others wont charge until the break exceeds a certain trigger. All lenders have policies. I believe lenders are required to provided a break cost value BEFORE it is authorised. You can call and request this anytime.
     
  9. Keentolearn77

    Keentolearn77 Well-Known Member

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    yep - my payment will be nothing - rates much the same, just a $350 break fee
     
  10. jazzsidana

    jazzsidana Mortgage Brokers - Investment Savvy Business Member

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    Always good to check with the bank..

    Only recently did loan application for one of my clients and he still had 9 months go with break cost of $250.

    However, rate was lower with the new bank and we had equity released at the same time for future investment. Good overall win!.
     
  11. Morgs

    Morgs Well-Known Member

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    Haha - yeah this is the truth!

    You lender is the source of truth on this...

    A fair few people might find they're in a position to break in the current climate...