Check exit fees before switching home loans

Check exit fees before switching home loans

By Bob Wilson

The sudden drop in Australia's interest rates might prompt some borrowers to consider breaking fixed loan agreements or refinancing their mortgages.

Cash rates are now at 5.25% and most lenders will negotiate a new mortgage with a variable rate of between 7.0% and 8.5%. Many economists believe the Reserve Bank will cut rates again in late 2008 and early 2009 in an effort to avert a recession. If so, borrowers who entered fixed-rate mortgages early in 2008 will be seriously disadvantaged.

Interest rate research house Cannex says borrowers should take exit fees into account before refinancing, as some are facing fees equivalent to three months' repayments or more. Cannex recently produced a searchable database listing the exit or break fees charged by financial institutions engaged in mortgage lending. The database is available free of charge at http://www.cannex.com.au/

"Some people think switching their home loan is like returning a t-shirt that's the wrong colour," says Cannex senior financial analyst Harry Senlitonga. He says exit fees may decrease each year of the loan but discharge fees may still apply even when you pay out a 25-year loan at year 21. Some lenders also impose discharge and/or administration fees when borrowers close out a loan.

"Exiting a fixed loan could leave you paying an additional break cost, the size of which largely depends on interest rate movements between the time the loan was taken out and the time you are looking to break the loan," Senlitonga says.

"If the current interest rate is higher than the rate you locked in, you probably won't be charged a break cost. But a three-year fixed loan negotiated earlier this year, say at 9%, is likely to carry a break fee because the average three-year fixed rate loan now is 7.24%."

Cannex says rules vary from loan to loan. Some home loans have zero exit fees but the majority carry fees from the first one to five years of a mortgage. These early termination fees can be a straight out dollar amount, a percentage of the original amount borrowed or extra monthly repayments.

Cannex gives individuals the opportunity to search their own lender's fee structure to establish what the institution charges for early termination or break fees. Cannex also gives a hypothetical example which demonstrates how breaking a loan could cost borrowers.

"Fred borrowed $250,000 on a 3-year fixed rate loan 6 months ago. The fixed rate was 9% and, at the time, the money market rate for a 3-year fixed loan was 7.44%. Fred now wants to refinance, with two and a half years to go on the loan. The money market rate for a 2.5 year fixed loan has now dropped to 5.55%. The total break cost is $10,300, based on the outstanding balance and the current money market rate."

Cannex produced a survey in February that showed more than 15,000 mortgages on three-year fixed terms were due to expire this year. The average fixed interest rate in February 2005 was 6.83% (compared with 8.47% in February 2008). Many may have opted for a fixed rate earlier this year when standard variable rates looked certain to go above 9%. Now that fixed rate loan rates look to be heading towards 7%, for many borrowers the additional fees to refinance may seem to be worth the risk.

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This article is taken from the Investor Alert page of the Hotspotting website http://www.hotspotting.com.au. We highly recommend this website for people interested in real estate.


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