# Break Costs?



## johnnyg (13 October 2008)

Hey guys, just looking for some thoughts on my current situation regarding my home loan. Im currently 1 year in on a 3 year fixed rate. Now my fixed rate is set @ 7.69%. With all this talk of interest rates falling to 5% by christmas has got me thinking wether or not im going to be caught out with my rate set @ 7.69%. Now reading threw my Bank Documents this is what it has to say on re Break Costs -

_If all or any part of the fixed rate loan is converted to a variable rate during the fixed rate period, you may be liable for Break costs. Break costs are the amount calculated by us as being our costs and loss as a result of the loan or any part of it being repaid early during the fixed rate period._

Now say for instance I decided to change from my fixed rate to a variable rate (and I had the perception that interest rates were going to continue to fall under my current rate of 7.69%) I assume I would be better off breaking the contract while the banks current variable interest rate is above my fixed rate (which is currently @ 7.94%) then say in a few months time where the interest rate could be 1 or 2 % underneth my fixed rate which would therefore allow the bank to calculate a larger break cost that id have to pay?


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## robots (13 October 2008)

hello,

just sit tight at the moment, you still about 30 basis pts of basic variable from big 4,

otherwise do the numbers to see if "costs" are less or more than saved,

if any spare cash sit in loan account,

you on a winner with rates coming down, way down

nirvana

thankyou
robots


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## MS+Tradesim (13 October 2008)

johnnyg said:


> Hey guys, just looking for some thoughts on my current situation regarding my home loan. ....




Have a look around. What you *may* be able to do with a sympathetic lender (not necessarily your current one!) is arrange a loan and pay down say 99% of your current loan. Give it a day or so, then pay out the balance. You would then be only up for the break cost on the balance rather than the whole loan. Read your loan docs carefully for loopholes like this.

Ps. I did it once, with my own lender...at their suggestion.


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## nomore4s (13 October 2008)

MS+Tradesim said:


> Have a look around. What you *may* be able to do with a sympathetic lender (not necessarily your current one!) is arrange a loan and pay down say 99% of your current loan. Give it a day or so, then pay out the balance. You would then be only up for the break cost on the balance rather than the whole loan. Read your loan docs carefully for loopholes like this.
> 
> Ps. I did it once, with my own lender...at their suggestion.




Most lenders only let you pay off a certain amount extra each year if you lock the loan on a fixed rate. My loan provider only lets me pay off an extra $10,000 pa.


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## Ageo (13 October 2008)

nomore4s said:


> Most lenders only let you pay off a certain amount extra each year if you lock the loan on a fixed rate. My loan provider only lets me pay off an extra $10,000 pa.




yep as mine is with St george, the only way to change to a variable is by refinancing. Im spewing as im locked in @ 8.09%


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## MS+Tradesim (13 October 2008)

Time to find new lenders then. 

(Except your's aren't sympathetic)


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## johnnyg (13 October 2008)

Cheers for the replies guys. My lender also has a $10000 limit p/a. I think I might go and have a chat with my mortgage broker and see exactly what sort of break costs ill be looking at.


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## Mofra (13 October 2008)

johnnyg said:


> Cheers for the replies guys. My lender also has a $10000 limit p/a. I think I might go and have a chat with my mortgage broker and see exactly what sort of break costs ill be looking at.



There is another possibility to discuss with a lender at your bank - a top-up loan to a variable rate, as often in the desperation for more business charges are waived in lieu of resetting the early repayment fee on your loan. If you refinance shortly after, you will be liable for the ERF (which is $750-$1000 for the majors) instead of break costs whoch could be higher.

First step would be to request a payout figure from your bank - that will give you a guide on what penalties you be paying (if any).


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## skyQuake (13 October 2008)

Break costs can be quite substantial if the loan is less than a certain age (usually 1yr). Read your contract carefully, (if you've lost it you can request a copy for a fee of around $50). If your provider has taken out LMI its gonna be a bit more expensive too as they will have clauses that recover that cost from you.

Have a look at the yield curve and decide for yourself if its worth it (18month)
http://www.asx.com.au/sfe/targetratetracker.htm
Futures mkts are expecting 4% by March 09.

Cheers.

Edit: You can also a partial discharge, but call up ur mortgage provider and suss out the details. Because you're on fixed, extra payments (past $10k a yr as you mentioned) is pretty much breach of contract and you will have to pay break costs.


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