Switching  Your mortgage provider ( Bank)

Many smaller mortgage providers and smaller banks ( ING , ANZ ) have come out with offers  to switch to them  from the bigger banks, but obviously people will have to do their research ( and math’s) before switching if its going to be good for them in the long term.

Break Fees and Exit fees

Exit fees are widely considered a major hurdle for borrowers who want to change banks because the fees can outweigh the benefits of lower interest rates at a competing institution.

Ing has a offer on the market already to grab some market share of the loan market. Don from ING says “the deal is, $1000 dollars to switch your bank, move with your feet, come to ING direct.

There has been a huge media blitz recently over bank  rates and people wanting to  shift their home loans to different more cheaper providers and also great offers coming through for people to switch with exit fees being borne by the receiving bank and similar offers. What no one  has talked about and which can be equally important is the “Break fees” for a mortgage loan.

Break fees more than EXIT fees

So what are break fees ?

The dollar amount owed to the bank if you pay out a fixed-interest home loan before the term is up is called a break cost.  .

Break fees are only applicable for fixed rate loans . This is incurred when you have a fixed rate home loan and want to terminate you loan or then refinance you loan with another provider. With break fees,  the longer the time remaining on your fixed loan, the larger the break cost can be. It is very important that you check with your home loan provider  how much you “break fees or costs” would be  before you decide to change your home loan to another provider or pay out the loan

Break fees can also be known as termination fees , prepayment economic cost, Early repayment fee, Early repayment adjustment.

EXIT FEES CAN CONTAIN ALL THE THREE COMPONENTS COSTS AS BELOW

1. Early Termination Fees

Early termination fees may or may not be charged, depending on how long you have had the loan. This fee typically applies for the first five years from the settlement day.

2. Break Costs ( Applicable for fixed loans)

Break fees or Break costs  may or may not be charged, depending on current interest rate situation relative to original interest rate at the time you took out the loan.

3. Other Fees

These include discharge fee, administration fee and any other fees associated with closing your loan.

Julia Gillard has confirmed the corporate regulator, the Australian Securities and Investments Commission (ASIC), will  seek to publish new rules banning the imposition of unfair bank exit fees on mortgages. Mortgage exit fees, which cost customers upward of $900, could soon be scrapped by the banks to increase their competitiveness.

How Break fees work  and calculations

When a bank provides a fixed rate loan they borrow money from the wholesale money markets.Their interest rate is locked in at the same time as your home loan is taken. If interest rates drop and you pay out your fixed loan the bank cannot lend that money again at that higher rate, thus they are losing the difference in interest rate drop. Therefore this cost is passed on to you.

Each bank uses their own complex formula to calculate the break fee but the general concept for the calculation is as follows

Break Cost  =  Amount of loan remaining  X  Loan term left  X  Drop in wholesale interest rates.

The resultant break fee can be thousands of dollars. Therefore it’s very important to make the correct decision  or then check out the break fees with your bank  while termination or refinancing a loan.

Ref:

http://www.canstar.com.au/exit-fees/

Fixed Interest Loans – Break Fees

Mortgage exit fees are fair, say bankers

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