By mid-morning on Thursday, mortgage broker Glen McLeod, of Edge Mortgages, had already dealt with a number of inquiries from clients wondering whether they could break their fixed home loan terms to take new, lower interest rates.
The Reserve Bank cut the official cash rate by 50 basis points on Wednesday and banks had already been moving rates significantly lower in recent weeks.
While even specials on one-year rate were more than 7% in May, ANZ this week offered a 5.59% rate to its customers.
The problem for people with fixed mortgage rates, though, is that breaking a term and taking a new rate when rates have dropped usually means paying a break fee.
This is calculated based on factors including the interest rate that someone has agreed to pay, how long they have left at that rate, and what rate the bank could lend the money at now.
In discussion groups online, people were asking similar questions to McLeod’s clients: “We have a fixed rate at 6.65%, rang the bank to ask if we can break and pay the fee upfront, we were told $10,000,” posted one.
Westpac and ASB said they had noticed an increase in inquiries, too.
“You’ve got to look at what the cost is,” McLeod said. “I have a break rate template that looks at how many days left to go, the rates being offered, what you’re being charged. In a lot of cases all you’re doing by breaking it is paying the savings you’re going to make.”
He said he dealt with another case recently where the break costs would have been $4500 to save $5000. “They said ‘that’s OK we’ll chuck that on the mortgage’. But when I said you’ve got to actually come up with the $4500 to do it, they didn’t have that so I said ‘well what you’ve got to do is wait it out’. You realise it’s only $500 we’re talking about, it’s not $4500.
“Banks never lose, they pass on the cost they would have lost to you.”
He said anyone who was able to add a break fee on to their loan would find it was an expensive solution because the additional interest would reduce any saving that could be made.
There were situations where it made sense to break a term, he said, but it had to be done carefully. “You shouldn’t just jump into it and go ‘yes, I’m going to have a reduction’. What is the true cost? That’s the beauty of the work we do — the numbers don’t lie, the numbers are the numbers. It’s about making sure you understand what those numbers are before you go out and put your capital into paying for that break cost.”
The chief executive at mortgage broking firm Squirrel, David Cunningham, said it was not getting inquiries because most people did not have long to go on their loans.
He said most break fees were calculated using wholesale interest rates, which had fallen even further than retail rates so far. “So the break fee is very likely to increase the cost rather than provide interest rate savings.”
Massey University banking expert Claire Matthews said people who signed up for fixed rates were making an agreement to pay a certain amount for a set time.
“Then all of a sudden they don’t want to… they say it’s not fair, they didn’t know interest rates were going to go down. That’s why people were saying recently don’t fix for too long because it looks like interest rates might come down.”
But she said people should acknowledge that they had often benefited from fixed rates, too.
“They may have had an advantage when interest rates went up and they were on a lower rate for quite some time, this is the reverse of that. It’s the whole swings and roundabouts — it’s hard to benefit both ways.”
She said people who wanted to break and fix now would have to think about how they would feel in six months’ time if interest rates had fallen substantially further. “Are you going to do it again?”
It would come down to people’s individual circumstances.
“When I had a loan, my view was I had a fixed rate because it gave me certainty about what my payments were. I didn’t have to think about what I was paying for the period of that and would have to reset it at the end of that fixed rate.”
rnz.co.nz
