All Topics / Finance / How to break a fixed rate exit fees

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  • Profile photo of TerrywTerryw
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    Break costs are fees associated with coming off a  fixed rate. Totally separate to any exit fee. They would apply if you broke the fixed rate and stayed with the bank for example.

    Michael, aren't  you one of the refund brokers that was posting on here a few years ago? "The Mortgage Detective" then wasn't it?

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    Profile photo of Solomon10Solomon10
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     Reading through these posts the most important thing to me seems to be : never sign a contract without reading it and understanding it first. Laying blame on brokers/banks/financial planners etc is no excuse for not knowing what you are getting into before signing a contract involving large (or small) sums of money.

     The break fees for a fixed rate loans would have been stated in the contract for the loan.

    Profile photo of TerrywTerryw
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    And it is only reasonable that a lender charges break fees. You are taking a bet on rates after all. And if you get it wrong you shouldn't be able to back out without penalty near the end while benefiting at the beginning.

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    Profile photo of Michael.LeeMichael.Lee
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    Gidday Terry,

    Not to get off point, you can read about me in SMH here.

    No, I've never been a "refund broker" and No, I've never posted as "The Mortgage Detective" but Yes, my old username was mortgagedetective. However when I updated it to Michael.Lee my historical posts should have updated too.

    Although I must admit I don't know what "coming off a fixed rate" means and while your opinion sides with certain banks and brokers who lead the way in confusing vulnerable borrowers, it is not supported by evidence.

    Both ASIC and the Government define Break Costs as an Exit Fee. The deception and subsequent confusion lay around the Government's unqualified claim it had banned Exit Fees, when of course it had not.

    I remain a tad surprised at how few brokers and are interested in supporting the borrower on this.

    Profile photo of TerrywTerryw
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    Hello Michael

    Very good getting an article about yourself in the SMH. That is good marketing.

    What of the scenario where a borrower has fixed their loan for 5 years with ANZ thinking rates were going to rise. But rates dropped instead and so the borrower decides to break the fixed loan and revert to the variable loan and are charged a large exit fee to do so.

    (One of my mates did this years ago and paid $90,000 on a $1.6 mil loan. He was a broker too!)

    Do you term this an exit fee? Is it justifiable?

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    Profile photo of Michael.LeeMichael.Lee
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    Solomon10,

    I understand your point of view and agree, but offer the following inputs to your thoughts.

    Excepting solicitors, most people who read contracts don't understand them and have those bits they don't understand explained to them by people they trust i.e. their bank manager, their mortgage broker. If the banks and the brokers are wriggling around all over the place trying to convince you that a break cost is not an Exit Fee, then well, you know…

    Another point is that the contract will not stipulate a fee per se, rather a clause with some type of explanation of a formula or formulaic principle. It is unlikely to be called a Break Cost or and Exit Fee. It probably should start with something like WARNING, but of course it doesn't.

    And yet another point is that human nature means we tend to see only what we are looking for. Some borrowers are lead to believe that Exit Fees are banned outright and these people in believing this are more likely to not see the trap.

    And so on.

    The main point again remains that Break Costs are Exit Fees and the Government has declared Exit Fees abolished, when in fact they are not.

    This appears to have caught out dbomber and that isn't quite fair.

    Profile photo of Michael.LeeMichael.Lee
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    Thanks Terry,

    Yes it's an Exit Fee which if the loan was struck today, ought be illegal according to the Government advertising.

    But the point to this topic is that it isn't illegal even today, even though it is clearly an Exit Fee and even though the Government claims that Exit Fees are banned on all new home loans.

    If your friend got caught out this way by believing the Government (yeah, I know), then surely the Government shares at least some of the responsibility/cost, if not all.

    Profile photo of TerrywTerryw
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    I think your definition and the legal definition of exit fees differs!

    The legislation is
    NATIONAL CONSUMER CREDIT PROTECTION REGULATIONS 2010 – REG 79A
    http://corrigan.austlii.edu.au/au/legis/cth/consol_reg/nccpr2010486/s79a.html

    The ban doesn’t apply to Break fees or discharge fees

    subsection (3) defines these:

    break fee means a credit fee or charge that relates:

    (a) only to the early repayment of an amount provided under a credit contract for a fixed rate loan; and

    (b) only to the portion of the loan that is fixed; and

    (c) to the part of the credit provider’s loss, arising from the early repayment, that is a result of differences in interest rates.

    “discharge fee” means a credit fee or charge that only reimburses the credit provider for the reasonable administrative cost of terminating the credit contract .

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of gibbo1gibbo1
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    Hate it when when facts get in the way of a good story

    Also what Terry has quoted is current regulations, not a bill that may or may not get passed in current form

    Profile photo of Solomon10Solomon10
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    Michael.Lee wrote:
    Solomon10,

    I understand your point of view and agree, but offer the following inputs to your thoughts.

    Excepting solicitors, most people who read contracts don't understand them and have those bits they don't understand explained to them by people they trust i.e. their bank manager, their mortgage broker. If the banks and the brokers are wriggling around all over the place trying to convince you that a break cost is not an Exit Fee, then well, you know…

    Another point is that the contract will not stipulate a fee per se, rather a clause with some type of explanation of a formula or formulaic principle. It is unlikely to be called a Break Cost or and Exit Fee. It probably should start with something like WARNING, but of course it doesn't.

    And yet another point is that human nature means we tend to see only what we are looking for. Some borrowers are lead to believe that Exit Fees are banned outright and these people in believing this are more likely to not see the trap.

     As in my first post you replied to, the main thing is never to enter into a contract without understanding it. You unwittingly have supported my contention by saying human nature will lead some to only see what they want to see. So the blame if any must go to the borrower, not the bank or broker. Fixed rates are a gamble on future rate movements, you win some you lose some, this doesn't mean one party should be able to cancel a contract without any recourse when it no longer suits them, especially when it was spelled out in the original document.

    Profile photo of Michael.LeeMichael.Lee
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    Terryw

    Nothing new in your post and it pays to look at the thread where way back in the beginning  I posted:

    Michael.Lee wrote:
    Sorry Richard, you seem to be confused. What I said was:

    Michael.Lee wrote:
    Break costs on a Fixed Rate are an Exit Fee as are Discharge Fees.

    My reference to others who incorrectly say otherwise which creates the confusion includes you:

    Qlds007 wrote:
    As Jamie mentioned exit fee and fixed rate break fee are two totally different things.

    They are not totally different things as you have stated and it is this misinformation from banks and brokers like you which fuels the confusion.

    In fact SLI 2011 No. 40 which is the bill to which you are referring specifically identifies both a discharge fee and a break fee for a fixed rate loan as Exit Fees for the purposes of exempting them from the ban.

    The real issue is that the Government has claimed to have abolished Exit Fees outright, when its legislation still allows certain Exit Fees, including of course, Break Costs.

    This in essence makes the Government claims that is has banned Exit Fees an outright a lie and arguably in some cases makes those Exit Fees recoverable.

    Profile photo of Michael.LeeMichael.Lee
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    Gidday gibbo1,

    Also note my post linked to the actual current legislation SLI 2011 No. 40 rather than the resource linked by Terryw which carries an all care, no responsibility disclaimer.

    You can also view the complaint to the Commonwealth Ombudsman on Exit Fees here which I encourage you to do if you would like to research the issue and respond more thoughtfully.

    Thanks,

    Michael

    Profile photo of Tracey BTracey B
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    Interesting thread with you mortage guys battling it out on the technical bits.  The banks will do what they do, as per the agreement and it's unfortunate if you feel you've been mislead.  I'd be looking at what the break cost is, compared to what I can now borrow the money for ie. if the penalty is 1% and I can now borrow from another lender @ 1.5% less, then I'd be in front (depending on other costs).

    I guess too, it depends whether you think interest rates are going down further, up or staying the same.  If you think they're going down further it might be better to break sooner rather than later so the interest penalty is less…..lots of variables which is always the challenge when deciding to fix or not to fix.

    If it's any consolation – the only time we fixed it was at 8+% years ago for our first property purchase and then interest rates went down and then we sold so had a break fee :-( The upside for fixing: it gave us peace of mind, knowing that our payments were going to be managable for the first few years in our first home.

    Profile photo of luke86luke86
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    Michael- I dont think you can win on this 'battle' with the banks. If banks can't charge break fees (or exit fees if you want to call it that- lets not debate semantics) then they would not be able to offer fixed interest rates. Otherwise, everytime the variable rate drops below the fixed rate, everyone would just break their fixed rate contract and go back to variable.

    It is very clear (in my opinion) that when you sign up for a fixed rate mortgage you will pay break fees if you refinance out of the loan before the contract term is up. I have a friend who signed up to an 8% fixed rate loan in about 2007 just before variable rates went down to about 5%. He was kicking himself but that is how it goes- you win some you lose some and he understood that he just happened to lose this time.

    I cant see the issue here.

    Cheers,
    Luke

    Profile photo of Michael.LeeMichael.Lee
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    Thanks luke86 and you too Tracey B,

    However this isn't a battle with the banks, it's with the Federal Government. It also isn't waged on the basis of people who understood what they were getting themselves into (although I understand that people like Solomon10 think that they should have known what they are getting themselves into and should foot the bill).

    It is for people like dbomber who have relied on information from the government and advice from perhaps less scrupulous operators on how a Fixed Rate actually works. Just like everybody here, he is entitled to some independent, reliable input.

    I also understand that most users in this forum have a passion for answers BEFORE they take the leap, but I also understand that doesn't apply to the whole fixed rate population and I was really only responding to dbomber.

    There is the sideline distraction that some are running claiming Break Costs are not Exit Fees, they clearly are. It's simply a case that the Governments abolition of Exit Fees wasn't really an abolition, which is why this is a battle with them and not the banks.

    The motto I subscribe to is "Man fool you once? Shame on him. Man fool you twice? Shame on you". It is the people who got fooled once by the Governments Exit Fee ban that this fight is worth having.

    Cheers,

    Michael

    Profile photo of TerrywTerryw
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    Michael.Lee wrote:
    Gidday gibbo1,

    Also note my post linked to the actual current legislation SLI 2011 No. 40 rather than the resource linked by Terryw which carries an all care, no responsibility disclaimer.

    You can also view the complaint to the Commonwealth Ombudsman on Exit Fees here which I encourage you to do if you would like to research the issue and respond more thoughtfully.

    Thanks,

    Michael

    Michael (Gidday)

    I am not sure what you mean by this.

    SLI 2011 No. 40 amends Regulation 79A of the

    NATIONAL CONSUMER CREDIT PROTECTION REGULATIONS 2010

    Reg 79A can be found at http://corrigan.austlii.edu.au/au/legis/cth/consol_reg/nccpr2010486/s79a.html 

     

    This regulation prohibits exit fees. But it does not apply to break fees for fixed loans.

    A break fee is defined at Reg 79A(3) as

    break fee means a credit fee or charge that relates:

     (a)    only to the early repayment of an amount provided under a credit contract for a fixed rate loan; and

     (b)    only to the portion of the loan that is fixed; and

     (c)    to the part of the credit provider's loss, arising from the early repayment, that is a result of differences in interest rates.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of Michael.LeeMichael.Lee
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    Gidday Terry,

    Sorry for your confusion. Your link goes to a third party website that is not the actual legislation. i.e.it's a repost for the universities, hence the disclaimer it carries.

    Regardless, I had posted the link to the actual legislation (SLI 2011 No. 40) back in the beginning which in itself confirms that break costs are Exit Fees.

    Again as per my post a moment ago, the core issue of liability is that the Governments claimed abolition of Exit Fees wasn't really an abolition, which is why this is a battle with them and not the banks.

    The Exit Fees complaint link that I posted explains this in more detail including evidence and arguments if you are still grappling with the issues. I think if you give it a read, it will make things clearer for you.

    All the best and thanks for checking,

    Michael

    Profile photo of TerrywTerryw
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    Austlii is the most common website used by lawyers to check legislation. It may not be 100% as up to date as the commonwealth Govt one but it is much easier to use.

    In this instance it is up to date and contains the same wording as the one you linked to, which wasn't the actual Regulation, but the update to it.

    Now I get what you are saying: Govt is unjustly excluding "break fees" from the definition of "exit fees".

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of luke86luke86
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    Yes, it is all politics. I am not convinced that the government was actually trying to implement change. I think they were mostly concerned with trying to look like they were looking after the average battler and going after the big greedy banks. And the reason for doing this was so they can win votes.

    Profile photo of Marty McDonaldMarty McDonald
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    It would be nice if the ban included break costs on fixed rates but the commercial reality is if that happend the fixed rates would have to be higher to allow for this.

    I also take umbridge to the fact that this is confusing to borrowers. I always make sure clients are FULLY aware that break costs are possible when taking a fixed rate loan. To be sure I have  them sign a document and initial it right where it says the same. All brokers worth a pinch of salt would do this.

    I also posted an articale on my website about how they mechnaics of break costs are calculated for those interested. I too saw a few $60K and $50k break costs during the GFC.

    http://mortgageexpertsonline.com.au/fixed_rate_loans/fixed-rate-loans.htm

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