Early repayment and mortgage break fees
November 01, 2018 at 4:40 PM
AUCKLAND, New Zealand: When you fix the interest rate for your home loan, you are entering a contract with your bank that sets the interest rate, term and payment amount for your loan. In some circumstances, you may want (or need) to break this contract—for example you might be:
- Selling the property
- Switching banks
- Paying a lump sum toward the loan
- Switching to a better interest rate
By law, NZ banks are obligated to allow a fixed rate contract to be broken. However, they are also entitled to charge a fee to cover their losses. Banking regulations limit this fee to recovering costs—they cannot ‘profit’ from the transaction.
These ‘costs’ are confidential to the banks but LoanPlan can help you calculate the break fee your bank is likely to charge, if any. (If interest rates have gone up since you fixed your loan, the bank is less likely to charge a penalty fee.)
Obviously if you are planning to sell your property in the next few years, it may be sensible to keep your mortgage on a floating rate loan—which can be fully paid off at any time with incurring fees (always take professional financial advice before acting).
If interest rates have dropped significantly since you fixed your loan, it may be worthwhile to pay the break fee and re-fix at the lower rate. Sometimes a competing bank may be offering a better deal, but you need to factor in the legal costs of switching banks before you ‘jump ship’. (Some banks may cover these legal costs if they really want your business).
Some banks will allow you to make limited lump sum payments on a fixed rate loan—usually up to a percentage of the original drawdown amount. A split loan (part fixed, part floating) is a great option for lenders who often come into extra money, as it allows you to make extra payments on the floating mortgage.