Fixed mortgages: To break or not to break? 

Source: NZPA / Ross Setford

• WATCH the video (4:06)

Banks are coming under pressure to reduce their break fees so home mortgage holders can access lower interest rates more easily.

On Thursday, the Reserve Bank slashed the Official Cash Rate to a record low of 3.5%, and banks began to adjust their lending rates accordingly.

Floating rates for major banks on Thursday were between 6.49% and 7.50%.

The extent of the fall in variable mortgage rates has caused a rush of home owners trying to get out of their higher fixed mortgages. One mortgage broker points out that those with a $200,000 mortgage could now save more than $150.00 a week.

But, breaking a fixed term mortgage can be alarming - the lower the rates go, the higher the penalty fee mortgage holders have to pay. For some, breaking a mortgage can reach tens of thousands of dollars.

Loan Market mortgage broker Bruce Pattern says those considering breaking fixed term mortgages should get in touch with their bank or mortgage broker and find out how much it will cost to break their mortgage, and how much they are likely to save on a new rate.

"In basic terms...if you can recover your costs between now and when you were due to come off fixed, then I think it's worth doing because then you can float the interest rate, see what happens, and hopefully lock in near their low point or at their low point," he says.

He says rates are trending down so those who end up breaking their fixed term mortgage should consider going on to a floating or a very short term rate, for example six months, and sit on that until the rates bottom out. When this happens, mortgage holders can re-fix their rate and reap the benefit.

He warns there will be some crystal ball gazing but says the outlook is positive.

"The good thing is that all the information that's coming out is that things are getting worse, that the rates are going to keep coming down. At the moment there are no factors that are saying the interest rates are going to turn around tomorrow. And even if they do, you've got time to lock it in again at any point," he says.

Breaking a fixed term mortgage does not require money up front if the mortgage holder has equity in their property. In this case the fee can be added to the mortgage.

Meanwhile federated farmers is praising Rabobank for being the first major financial institution to pass on the full amount of the cut in the official cash rate.

It is dropping its variable base rate on rural loans by 1.5%.

Federated Farmers says what Rabobank has done puts a lie to other banks'  justifications for not passing the cuts on.

For those who believe they are facing excessive penalties for breaking their mortgage, complaints can be made to either the banking ombudsman or the Commerce Commission.

Add a Comment:

post new comment