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Should you break your Mortgage?

As kiwis have seen interest rates drop like a rock over the past year and with the reserve banks drop of .75 mostly all being passed on to home owners it’s a good time to take a look at the cost of your funding.

If you have lending of say $670,000 fixed at 5.25% until the 3rd of Feb 2021 you have another 317 days in that contract.
This lending will likely be costing you around $4,015 per month where as if you broke it you can currently get a 12 month rate of 3.05% (ANZ) which will make your repayments $3,195 per month.
On the face of it a saving of $8,610 over the term of the fixed loan, even if you went to a floating rate your better off by nearly $6,000.
To break that contract you will likely be required to pay a break fee from your bank, banks now have to show you the cancellation fee calculation and are only able to bill you for the “Actual” loss to them.

If your break fee on this lending came to $2,000 you would most likely be happy to break it, even at a break fee of $5,000 your way better off.
Often if you take your lending from one bank to another the new bank will pay you a contribution towards this break fee depending on factors such as your account conduct, the size of the lending and the term you are prepared to re-fix for.

Consider also that a break fee is a “bank fee” not penalty interest as a lot of people think so coming up to the end of the financial year its possible you can claim the break fee against your income if the property is a rental.

This can further reduce the pain of paying the penalty as essentially you could be getting 33% of it returned as tax relief.

But there are other considerations to take on, if you break a mortgage and put another one in place you will have some administration fees and possibly legal costs as well.

Break fees are upfront and so you normally can’t capitalise them or add them to the loan in most cases.

It’s also a good time to look at whether you re-fix the lending or leave it floating, you would consider fixing if you expect interest rates to be higher in 12 months once this fixed period completes or leave it floating if you felt rates may drop over the same period.

As always banks are looking to protect their market share so everything is negotiable so have a go at seeing what sort of deal you can get regarding:

  • Break Fees
  • Interest rates
  • Reduction in administration fees
  • Legal costs

Cash contribution if switching banks
Lastly consider this, when you ask your bank for a “Break fee cost” from them you are making it known that you may move your lending to another bank, thats a great time to ask if they are willing to reduce your interest rate to keep your business or give you a discounted rate on any floating loans.

If you can get a better deal from your existing bank without needing to break or move banks it could be the easiest money you make all week.

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