With the recent attention focused on the Federal Government’s abolition of exit fees on standard variable loans (SVR), what about fixed rate loans. What charges are payable when a fixed loan is paid out early? How does a lender calculate break costs?
Break costs are a fee charged by lenders when you make extra repayments on a fixed rate loan, or you pay the loan out before the fixed term has expired. Most lenders will allow you to pay a small amount off your home loan each year without being charged, however if you go over this amount or pay off the loan entirely then you will be charged this fee.
According to Cameron Baseley, Aussie’s Senior Manager – Lender Relationships, different banks use different names for their break costs. Some common names include economic costs, exit fees, early repayment adjustment or prepayment fees. Often your bank will not know what you are talking about unless you use their terminology:
“When a bank funds a fixed rate loan they borrow money from the wholesale money markets,” Mr. Baseley said. “If the customer repays this loan early, there are often costs to the bank of unlocking their funding or re-lending these funds. The banks recoup these costs from customers in the form of break costs.”
He added: “Recent legislation has clarified that while a lender is entitled to recover its costs, it should not earn a profit.”
Cameron’s tips for fixed loans
- Seriously consider whether or not a fixed loan is the best option. Ask yourself whether you’ll be likely to want to refinance or move (and pay it off early) within the fixed period.
- Look at the fine-print. Can you make extra repayments without being penalised?
- If you think you will struggle to pay your mortgage if rates go up by even 1-2 per cent, fixing part of the loan might be a good each-way bet. Remember that this goes both ways – official interest rates may drop, but you are left paying the higher fixed rate.