Break fees are charged by lenders when a fixed term loan is repaid early and the lender can only ‘on lend’ that money to someone else, at a lower rate.
This has not been an issue over the last couple of years of course but now, as rates fall and will fall further, break fees are becoming not only the norm, but also in some cases, a significant amount.
Why?
When you lock in a rate with the lender, you are in fact entering into a contract that states for X months you agree to pay %X on your loan. This also applies to a rate lock before you settle, so it’s really important to discuss this with your Adviser before signing on the dotted line. Some banks charge a recovery fee, for example if you agree to one rate, then before settlement, you choose another. Break fees are strictly regulated, and lenders cannot make a profit out of you, as they can only recover their loss.
For Example…
If you lock in a rate of 7% for 12 months and 6 months later, for whatever reason, you wish to break that agreement, the lender is not concerned as to why, whether it’s selling, or moving to another provider for example. If the rate has dropped to 6%, then the bank makes a ‘loss’ of 1% on the loan amount for 6 months and this is the basis of the break fee charged. The bigger the loan and the bigger the rate difference, the bigger the break fee. I have never known a lender waive a break fee, unless additional lending is taken out with that lender elsewhere.
Now, it’s not quite that simple!
The calculation is not solely based on the rate you are paying. It’s also on the rate at which the lender acquires it’s funds (the wholesale market) and so as the equation is complex, it’s best to ask your lender in advance to get a quote, before making any financial decisions.
Some thoughts going forward
Be aware of your commitment.
In the current environment of falling rates, make sure you fix for a period that you can commit to. There is no one size fits all here, so please seek the advice of an Adviser to make an informed decision.
Do the maths!
If you do break a fixed term for a lower rate, then the cost of break fees and other fees may make the exercise pointless.
As at today (November 2024) a lot of people who are breaking loans, are remaining on floating for a while in the hope that RBNZ will cut the OCR later in the month and that fixed rates may well drop further.
This is always a bit of a gamble, as floating rates are higher than fixed, so doing the maths is critical to getting the balance right.
Break fees change daily
Break fees can and do change daily, as lenders charge interest daily and if wholesale rates (the rate at which lenders buy the funds) change then the break fee can change too.
In the current volatile market lenders cannot commit to break fees for more than a few days, so if you do get a quote, check how long it’s valid for.
Selling your property?
If you are selling and then buying again, it may be possible to ‘transfer’ your fixed rate to another property. It’s important to get this confirmed by your lender in advance of making plans for the move. There’s nothing like an unexpected large extra cost to dampen the excitement of moving home.
Get a quote
Some lenders can do this online, and others require a phone call or email.
Whichever method is used, read the small print – especially how long the quote is valid for.
Final thoughts
Giving generic advice on breaking a loan is impossible as there are heaps of factors at play, including personal preference, attitudes to risk and of course that old favorite ‘the crystal ball’!
Of course, if you want tailored advice, or just a chat about this, just pick up the phone and call
0800 LENDER (536337) or email to [email protected]
