WBC Fixed rate break fee

Discussion in 'Loans & Mortgage Brokers' started by bunkai, 10th Jul, 2019.

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  1. bunkai

    bunkai Well-Known Member

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    Westpac quoted on breaking some loans. They all have 11 months remaining. All interest only.

    PPOR 900k: 4.46% fixed break fee = 1.6% of loan value
    IP 50k: 4.45% fixed = 0.57%
    IP 100k: 4.45% fixed = 1.5%
    IP 60k: 4.45% fixed = 0.35%

    There was some "discount" applied against the headline rate if that matters.

    Given the 1 year fixed IO IP rate is 4.59%, should I be as confused as I am with what they have quoted including the fact it appears to be slightly random?
     
    bunkai, 10th Jul, 2019
    #1
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  2. Dean Collins

    Dean Collins Well-Known Member

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    My thinking is - Wait it out 11 months......if anything rates will be lower in 11 months OR around the same with a slight "up rise" from a lower point from here.

    Unlikely rates will be higher in 11 months from now and instead the next 5 year fixed period you sign up will (eg 3.99 with Macquarie Bank) extend out longer eg 5 years and 11 months from now when we will be ......who knows where.
     
    Dean Collins, 11th Jul, 2019
    #2
  3. wylie

    wylie Moderator Staff Member

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    I recently broke two Westpac loans (back in about February?). Cost was $300 fee plus one break fee was $29 and the other similarly low cost. This was because the fixed rates were 3.88% and current rates are so low.

    We broke the loans because we had cash sitting in an e-saver earning interest we will pay tax on whilst the most we could put into each loan was $30k. I was told at any time we cannot have more than $30k sitting in the "available" column for any fixed loan.

    The savings we made by breaking was worth doing it. Any higher cost and we would have left them to play out.

    Perhaps the rules have changed, but I don't understand why the break costs are so different for each of your loans. Perhaps call the loan retention team and ask for someone else to review the costs?
     
    wylie, 11th Jul, 2019
    #3
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  4. housechopper2

    housechopper2 Well-Known Member

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    Break fees are related to the difference in current vs future interest rate. With an IR of 3.88%, your loan was closer to the currently available rates than the OP.
     
    housechopper2, 16th Jul, 2019
    #4
  5. wylie

    wylie Moderator Staff Member

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    That is correct. Had rates been different, and the break fee not been worthwhile for us, we would have waited it out.
     
    wylie, 16th Jul, 2019
    #5
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  6. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    Break fees are a function of the cost of funding the loan, today's cost of funding the loan and the time remaining for the fixed period. I believe the banks publish the algorithms used but there's no way to verify the values of some of those variables.

    The cost of breaking a fixed rate can change from one day to the next, so it can definitely change from one loan to the next.

    My general observation is that the break cost is usually significantly higher than what you'd save (assuming rates don't change moving forward). I had a client break a fixed contract last week. The economic justification is that he had enough cash to almost fully offset the loan. Had that cash not been available, the break cost would have been about double the saving from the rate difference.
     
    Peter_Tersteeg, 16th Jul, 2019
    #6
    Brady likes this.
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