After the fifth cut in 12 months, some borrowers could be feeling the urge to break the fixed term loans they entered a year ago, in order to grab a cheaper rate.
But be warned: breaking a fixed term might just take a chunk out of your short-term budget with early exit and break fees. In this report, we compare the costs and benefits of breaking a fixed term and other options when looking for a lower interest rate.
What is a break fee and who’s charging it?
A break fee (also known as ‘discharge fee’ or ‘termination fee’) is charged when you pay out your mortgage in full. Lenders typically charge a break cost if you want to break the fixed rate term to switch to a lower interest rate, or you want to pay off your fixed rate loan in full.
The typical break fee in New Zealand is charged as a flat fee to represent the cost to the bank of you switching products. The table below summarises the break fees we found in our research, which apply to residential floating rate and fixed rate home loans:
|Discharge Fees for Residential Home Loans|
|3 Year Fixed||$0||$200||$95|
Based on $350,000 loan amount and 80% LVR.
What is an early exit fee and who’s charging it?
An early exit fee is a fee charged if you repay your home loan in full within a specified time period. This fee is limited to recovering the loss your lender suffers when you switch to a different home loan provider or repay your loan on your own. This loss represents all the interest that you would have paid them over the scheduled life of your loan.
Early exit fees are also called ‘early termination’ or ‘early discharge’ fees, and they can also be called ‘deferred establishment’ or ‘deferred application’ fees by some lenders.
The table below summarises the early exit fees we found in our research, which apply to residential fixed rate home loans:
|Early Exit Fees for Residential Home Loans|
|1 Year Fixed||$0||$250||$60|
|2 Year Fixed||$0||$250||$60|
|3 Year Fixed||$0||$250||$60|
|4 Year Fixed||$0||$100||$35|
|5 Year Fixed||$0||$100||$35|
Based on $350,000 loan amount and 80% LVR.
What could it cost to break a fixed term loan?
In this year’s ratings, we have identified 5 institutions that charge both a Discharge Fee and an Early Exit Fee when you break a fixed rate loan. These institutions are:
- ASB Bank NZ
- Kiwibank NZ
- ANZ Bank NZ
- SBS Bank NZ
- The Co-operative Bank
Of course, the fees aren’t high and these institutions typically make up for it in other ways.
Can you add break fees to your home loan balance?
Some lenders allow you to break your fixed term and add the break fees to your home loan balance. However, this does mean that at the end of your loan you may have paid more in monthly repayments, even after taking into account switching to the lower interest rate.
If you want to add break fees to your loan balance, your banking institution should talk through with you how adding these costs to your loan can affect you in the long term.
Why do banks charge early exit fees and break fees?
A fixed interest rate period in a home loan is a legal contract between you and your lender. The lender is agreeing to keep the interest rate the same for a certain time period, and you are agreeing to make monthly repayments until you fully repay the loan at the end of your loan term. If you repay your home loan sooner or later than your loan term, that breaks the terms of the contract.
Before making any decisions about breaking your fixed term and switching to a floating home loan, it is vital that you check your home loan contract carefully. As with other contracts, your home loan contract can seem complicated, but it’s still important to read all of it so that you know what your legal obligations are. If you have questions about your options for switching to a floating rate or reducing your fixed interest rate, ask your banking institution.
At the same time, banks do recognise that sometimes your financial or personal circumstances can change or emergencies can arise before the end of your fixed term. If you need to break your contract but you are in a position of financial hardship, talk to your banking institution about your options. There are alternatives to breaking your fixed rate home loan that might be available to you.
Is it worth paying extra fees to switch?
We cannot tell you whether it is best in your financial situation to pay break fees or to stick it out for the full length of your fixed term period. This is a decision you will have to make after carefully doing all the sums. What we will say is that with maximum fees of just $450, it won’t hurt much to shop around.
If you have a fixed rate home loan and you’re moving house, some lenders will let you avoid the early exit fee by using the portability feature. This lets you take your home loan from the old home to your new home, by simply switching which property is used as security for the loan. However, there are fees charged for using the portability feature, so it’s not a “free” switch.
Other options to help you save on your home loan include bargaining for a better interest rate, getting a lower rate but continuing to make the same repayments, or paying fortnightly instead of monthly.
Canstar’s star ratings system helps you compare home loans by selecting which features they do or do not include, so you can filter your search to look for the home loan that would best meet your needs.
In 2016, we researched and rated 58 home loan products from 10 providers in New Zealand. Take a look and find out if there’s a home loan out there that could offer you outstanding value.