With interest rates having been on a downward move over the past year, we are currently getting a lot of requests for comparing the cost of the break fee against the benefit of a lower interest rate.
What is a break fee and why is it charged?
The bank performs a function of lending out other peoples’ funds. To be able to offer a fixed rate for a number of years the bank makes a commitment to depositors who expect a fixed return over time.
When breaking a rate there is a cost to the bank as they still must meet their commitment of providing the return to a depositor. They calculate this cost using a complex formula which takes these factors into account. However the fee roughly corresponds to the difference between your rate and the market rate for the reminder of your term.
If you have another 1 year to go on your 5% fixed rate and the current 1 year rate is 4%; you would expect the break fee to be around the difference (5-4) 1% for 1 year. For a mortgage of $100,000 you would expect this fee to be more than $1,000.
This is a simplified version of the formula used by your bank so it pays to get a quote from the bank direct. This cost can change daily so you will need to re quote on the day that you are paying into your mortgage.
This article has been written by Hamish Patel, mortgage broker with mortgagesonline.co.nz. Ph: 09 625 4693, Mobile: 021 625 693, hamish@monline.co.nz
