When you obtain a fixed rate home loan with a lender / credit provider, you sign a fixed rate contract and agree to lock in your fixed interest rate for a specified period.
Thinking of breaking out of your fixed rate home loan?
Breaking your fixed rate home loan contract during the fixed rate period can be tremendously expensive. Therefore, if you decide to cancel, change, or prepay your loan, for any of the following reasons, you will be liable to your current lender / credit provider for any losses they incur due to your breaking their fixed rate agreement:
>> You want to break out of your fixed rate mortgage loan, because you have decided to sell the security property within the life of the loan
>> You decide to switch your fixed rate home loan to another lender / credit provider to take advantage of lower interest rates
>> You decide to switch from your fixed rate home loan to a cheaper variable rate home loan
>> You can prepay your fixed rate mortgage loan (either in part or in full), because you have received a lump sum of money or an inheritance, or
>> You want to make additional payments that exceed the accepted tolerance, because you may have received a raise in salary
Will I be charged a fee if I do not comply with my fixed rate contract?
There are two types of fees you will be responsible for if you cancel or “prepay” the loan early, and they are the amount you will owe the lender / credit provider if you decide to pay off your fixed rate home loan before it ends. the term. such as:
>> An early repayment adjustment fee (ERA) (this is the expensive fee), and
>> An early refund fee (this fee is usually a couple hundred dollars)
If you are still undecided whether to break your fixed rate contract, it is recommended that you:
>> First, you talk to your lender / credit provider and request a quote, which sets out the fees you will be charged if you decide to break up or “prepay” your loan early.
>> See the terms and conditions of your fixed rate contract to determine for yourself what rates will be charged
When you’ve done the steps above, you’ll be able to make a much better and informed decision about whether you still want to break up or “prepay” your loan early.
Do the breakdown rates have other names?
Breakdown fees have different names depending on your lender / credit provider, such as:
>> Exit fees
>> Download rates
>> Breaking costs
>> Early cancellation fees, gold
>> Early repayment rates
How are the breakdown and prepayment fees calculated?
Credit lenders / providers can choose a number of different ways when calculating break-up or prepayment fees to be charged, for example, credit providers / lenders can choose any of the following methods:
>> A simple dollar amount
>> A percentage of the amount you have borrowed, or
>> Default additional monthly refunds
Lenders / Credit Providers will calculate these fees as follows:
>> Compare the interest rate at which you fixed your loan with the current market rate, and
>> The length of time left on your loan is compared to the initial amount you borrowed.
Example: The following example will better explain the concept of how breakup / prepaid fees are calculated. The illustration assumes you have an existing loan on your security property and the loan details are:
Your current fixed rate loan amount is: $ 200,000
Your fixed interest rate is: 6%
Your fixed rate term is: 5 years
You have decided to sell the security property after 3 years and want to pay the full loan amount, and the interest rates have also dropped by 2%.
In the example illustrated above, the fee charged will be $ 800.00
Fee = $ 200,000 x 2 years x 2% (change in interest rate) = $ 800.00
How can a finance broker help you?
When considering whether to divide or prepay your fixed-rate home loan, take some time to research recent rate movements. More importantly, speak to a dedicated finance expert who can:
>> Help you compare the interest costs of a potential new loan and
>> Guide you towards the correct personal decision that best suits your needs and requirements.
So, here’s how you can successfully divide or prepay your fixed rate home loan.