The risks of breaking a fixed rate home loan

In 2008, the RBA cash rate reach 7.25%; so many borrowed chose a fixed rate home loan to avoid any further interest rate rises. But unfortunately for them, the cash rate has gradually dropped to a 53 year low of 2.50%. So after making a decision that they thought would save them money, now many fixed rate borrowers are paying a lot more in interest compared to those with a variable rate home loan.

Some mortgage holders like the security and stability that a fixed rate home loan provides as you know exactly what the repayment amount will be during the fixed term, but there are certain limitations. Some fixed rate products don’t include the extra repayment feature, which limits your ability to pay off your mortgage faster, and there may be break costs that can be costly. ‘Breaking’ a home loan may include:

• Refinancing to a different product (e.g. variable rate loan)
• Extra repayments
• Repaying the full amount before the term ends.

Different break costs can apply depending on which lender you go with. So, if you are comparing fixed rate home loans, make sure you ask the lenders what will equate to a break fee. Some lenders allow to you make a certain amount of extra repayments each year before they charge a fee. Even if you don’t see the term ‘break fees’ or ‘break costs’ on a home loan description, be sure to check with the lender as they may have a different name for it.

If you have a fixed rate home loan and are considering refinancing to take advantage of the low interest rate, you need to include the break fees when you do your number crunching. Break fees can often be quite expensive and cost thousands of extra dollars. Depending on how much time is left in the fixed period and what loan you are going to refinance to, this fee could outweigh the benefits of a lower rate. For example, if you have a fixed rate of 7% with 10 months left in the fixed term and want to refinance to a variable rate of 5%, you may actually end up paying more with refinancing and paying the break fee than if you were to stay with the higher rate for the next 10 months.

Depending on your current fixed rate loan and the current interest rate, refinancing to a variable rate home loan could possibly save you money. But you need to do your research and include all the extra costs to ensure you will actually benefit from the switch.

About Heidi Armstrong

Heidi Armstrong is the CEO for State Custodians Mortgage Company. Since founding the Company in 2006, State Custodians has grown to become one of Australia’s most respected non-bank lenders. Heidi holds a Law Degree, a Bachelor of Science and a Diploma of Finance and Mortgage Broking Management. An expert in personal finance, securitised lending and the mortgage industry, Heidi is passionate about sharing her invaluable knowledge to educate borrowers.

Widely recognised and respected by industry peers, Heidi was a finalist in the 2012 Australian Lending Awards for the Best Thought Leader. Moreover her Company, State Custodians, has received numerous awards, including Money Magazine’s 2013 Non-Bank Lender of the Year, a ‘5 Star’ CANSTAR rating on four of its main loans for six years running and the prestigious award for Best Overall Customer Service at the 2013 Australian Home Loan Awards (beating all of the major banks, credit unions and other lenders and mortgage providers for superior customer service).