Blog Article

With the recent announcement from the Reserve Bank on easing the OCR Banks have responded by reducing interest rates they have on offer that triggers many homeowners to think about refinancing their mortgages to take advantage of the lower rates.

While securing a lower interest rate and potentially reducing your monthly payments is attractive, it’s important to understand the potential costs involved, particularly the break fees associated with breaking your existing mortgage.

Understanding Break Fees

Break fees, also known as early repayment costs (ERCs), are penalties charged by lenders when a borrower pays off a fixed-rate mortgage before the end of the agreed fixed term. These fees are intended to compensate the lender for the interest they would have earned if the mortgage had continued until the fixed term expired.

The cost of break fees can vary based on several factors:

1. Remaining Term of Your Fixed-Rate Mortgage: The longer the remaining term on your fixed-rate mortgage, the higher the break fee. This is because the lender calculates the fee to cover the interest they would lose over the remaining term.
2. Changes in Interest Rates: The size of the break fee is influenced by how much interest rates have dropped since you first fixed your loan. If rates have fallen significantly, the fee may be higher as the lender’s potential loss is greater.
3. Outstanding Loan Balance: The larger your outstanding mortgage balance, the higher the break fee could be.

Is Paying the Break Fee Worth It?

Before deciding to refinance, it’s crucial to assess whether the potential savings from a lower interest rate outweigh the cost of the break fee. Here’s how we can help work this out:

1. Get an Estimate of the Break Fee: We can contact the Bank on your behalf to get an estimate of this cost to work out the cost as to what this might be.
2. Compare Current and New Interest Rates: We compare the current interest rate on your mortgage versus the rates available now. Even a slight reduction in your rate can result in substantial savings over time compared to the cost of what the Break fee may be.
3. Consider Your Future Plans: If you plan to stay in your home for many more years, the long-term savings from refinancing might justify the break fee. However, if you’re considering selling or moving within a few years, it may not be worth the cost.
4. Account for Other Costs: Refinancing usually involves additional costs, such as legal fees or valuation fees for instance. Ensure you factor these into your calculations to get a full picture of your potential savings or we can see what other solutions are out there to save on this cost.

What Are Your Options?

If the break fee seems too high, consider these alternatives:

1. Wait Until Your Fixed-Term Ends: If your fixed-term mortgage is close to ending, it might be worth waiting until it expires to refinance without incurring a break fee.
2. Switch to a Floating Rate: When your loan falls due and there may be chances that rates fall lower it may pay to wait on a floating rate before committing to a fixed term.
3. Talk to an Adviser: There could be other options you may not have considered or know about and finding more about how this cost can be of value going forward is key.

Work with one of our Advisers

The decision to refinance and potentially pay a break fee can be complex.

We can help you understand your options, run the numbers, and determine if refinancing is the right move for you. With interest rates on the decline, now might be an excellent time to review your mortgage and ensure you’re getting the best deal available.

While the idea of saving on interest is appealing, it’s essential to consider all the costs involved, including the break fee, to make an informed decision that suits your financial situation and long-term goals.

If you’re considering refinancing or want to discuss your mortgage options, reach out us by visiting our website to contact one of our skilled advisers.