How to break a fixed rate exit fees

Agree with Richard- the banks will make their money one way or another so I dont see how abolishing exit fees will reduce the costs for the consumer. The banks will either charge higher interest rates or just charge up front application fees. I couldnt see anything wrong with the deferred loan establishment fee as it was pretty clear what it was and what it was for, and they told you right at the start how much it would be- it was hardly hidden in fine print.

Unfortunately the banks need to charge exit fees for fixed rates, or else everyone would just fix rates when fixed rates are lower than standard variable rates and then refinance when the variable rates fall. You cant have it both (or all) ways!!

Cheers,
Luke

Only thing that was abolished was Deferred Establishment Fees as Jamie mentioned.

You still get charged a Settlement fee with most lenders on the way on and on the way out.

Break costs on a fixed rate loan are totally separate.

Cheers

Yours in Finance

Hi Dave,

I'll try and make this as clear as possible for you.

Firstly, you are not the only person to be "caught out" like this. It doesn't really matter whether you went through a bank or a broker as the majority of them out there do not clearly explain what you need to know about your mortgage. They are just happy to get your business.

Nothing has changed in regards to fixed rates. There always has been a break fee to a fixed rate if broken early. The break fee is calculated on your loan balance and takes into account the time remaining on the loan. So if you were to wait say another 6 months the break fee would be different (usually less) than today.

It can be easy to confuse fixed rate break fees with exit fees. However they are not even remotely the same.

An exit fee was applicable when either a loan was paid out in advance or refinanced with another lender. The abolishment of exit fees was introduced and intended to help make the playing field a little easier for home owners and investors to change lenders and to add "pressure" on lenders to offer their customers better deals on their loans. It's obvious that this has failed.

Fixed rate break fees are a cost that any lender will charge you for breaking your agreement with them. (Have a look through your mortgage documents and you will find a clause stating this) When you agree to a fixed rate you are basically saying that you will remain a customer with that lender for X amount of time. If you break this agreement the lender will charge you for losses in interest payments that should have been made according to your agreement. Fixed rate break costs have absolutly nothing to do with deferred establishment fees or exit fees and do not account for them now that they are no longer applicable. That's not to say that a lender may add some more icing on top for themselves! But who knows – right?!

Depending on your objective for your property it still may be worthwhile to break the fixed rate IF, and it's a pretty big IF, you will be better off financially in the end. It all depends on what you want to achieve with your property. Is it investment or owner occupier? Do you want to pay it off or not? Why did you go fixed just last year and for how long did you fix for? Why do you want to change?

Too many questions to add in here!

I hope this is clearer and helps answer your question.

Luke Goodman.
Mortgage Specialist
Ph: 0414 539 055

Remember this – anyone can buy property. But the structure and purpose of the loan can either work for you or against you.

Hi dbomber,

Just to clarify, and at a bit of balance to a couple of the comments……
A fixed rate loan is different to a variable in that is it a fixed contract between you and the lender at an AGREED amount – that you entered into by choice.  A variable rat loan, is a 'floating' rate.
When you get a fixed rate loan, essentially by way of example, you say "MR Banker, I want to borrow $200,000 for X amount of time for 7% and I promise I will pay you back at this amount. The Bank/lender does NOT have the funds for this type of loan – it is sourced from 'the money markets' rather than customer deposits. SO……Mr Bank says to all the rich people……..'Who wants to lend me $200,000 at a guaranteed return of 6% for x amount of time?' THey get this, and then make their 1% in this example. If you decide to break your promise/contract before it is due (the X bit) the bank then in turn has to break theirs' Obviously if rates went up to 8% you would not want to break your contract *unless you are selling or due to unforseen circumstances)  So if in the above example, both rates were 1% less, the bank still has to pay it's agreed amount to where it got the money from, and naturally so do you.
Hope that makes sense. SInce the GFC inparticular, you would be hard pressed to find any lender (including non bank lenders, who are much more restricted with this type of funding ) that will not ensure you have full disclosure of this, including information, brochures etc explaining how break costs work.
Trust me, if your loan is just over 7% it would only be recently that rates have dropped below that. How much money have you saved in the meantime?
Theoretically now is a good time to fix a loan for a few years for buy and hold properties as historically they are getting as low as they have been in 5 or 6 years. Then again……..

Re other costs ANZ and NAB don't have early exit fees, but all lendere will have discharge fees – it is an expense, and generally around $350, or more than that for credit unions etc. (attending settlement, paperwork, registration etc)

Cheers

Hi Dave,

You have every right to be confused. Besides you, Luke001 is the closest to the complete truth – i.e. that borrowers get caught out by the contradiction and misunderstanding.

The broker responses here demonstrate why this is such a problem. Although many now claim Break Costs on Fixed Rate loans are not Exit Fees, it is widely acknowledged that they are. Banks and brokers trot out a different line to keep themselves out of trouble when people like you start asking for a refund.

Break costs on a Fixed Rate are an Exit Fee as are Discharge Fees.

The issue here is that you and many other borrowers have been left in the dark – although it was promised that Exit Fees were banned outright, only one particular type has been. Everything else is smoke and mirrors.

I am aware of borrowers that have had their break fees on Fixed Rates waived or reduced., and if you have been duped, I think you should go after yours as well.

<moderator: delete language> Others trying to make a fool of you can only succeed if you let them.

Cheers,

Michael

Hi Dave,

Not sure of your whole situation but you really have two options. Do the maths to see which one works for you.

1. Stay wear you are and wear the costs.
2. Pay the costs and move on.

If you cannot do option 2 then I would suggest your only option is 'learn the lesson' and carry on. Worst case scenario is you know what your commitments are for the balance of your fixed loan and can budget accordingly.

I tend to have half of my portfolio fixed at any one time. This seems (and I use that word deliberately) to give me the best of both worlds.

If I go back and analyse my overall strike rate I am probably batting around 50% – half the time I have come out in front and the half not so good.  In saying that I have been able to focus on a bigger picture without worrying about what the RBA does each month.

EDIT – I know someone who claims to take 10yr fixed rate each and every time they buy a property. Mind you he is very commercial in his property investments. His reason "I do the maths, lock in contracts and set and forget" – seems to work for him.

Gidday yourokcproperty,

I agree with your basic sentiment that disclosure is the issue, not the fee itself.

Nonetheless, this is why it is such an issue that the Government, Banks and certain Brokers are insisting that Exit Fees are abolished and that certain fees historically and commonly understood as Exit Fees are, since the ban, somehow no longer Exit Fees.

It obviously confuses the issue and lulls at least some borrowers into a false sense of security as the "outright ban" is not outright at all.

Without a break fee, banks wouldn’t be able to offer fixed rates. Over a period of time the bank expects the fixed rate to balance out. If a consumer could get a cheaper fixed rate now and then change to a cheaper variable rate in the future without penalty…why would banks offer the cheaper fixed rate.

For some people fixed rates are an insurance policy for certainty. Others either take a gamble/educated guess on what rates will do. Sometimes they get it right and pay less in the long run, sometimes they get it wrong and pay the price (either higher interest rate or break fee)

The banks said the rates could raise, an agreement was entered into. To break the agreement, there is a fee payable.