Breaking bad: The cost of early loan repayments
Your bank’s break fees might account for all the savings you expect to make in a switch.
When your relationship breaks up and there are kids involved, there are lots of things to get sorted. Wills often have to be rewritten, property sold and arrangements drawn up for the care of the children.
But what about insurance? There can be confusion about who needs to insure what when kids move back and forth between two houses.
Do both parents need to take out insurance cover for a particularly beloved laptop or expensive gaming collection?
Or can one parent take prime responsibility under their contents policy?
Adam Heath, executive general manager of portfolio and products at Vero, pointed to research showing that only a quarter of 15-year-olds lived with both biological parents. He said that meant some thought needed to be given to how to structure insurance policies, where models were usually based on more traditional arrangements.
‘‘To understand how your kids’ belongings are covered, it’s important to think about where items normally reside,’’ he said.
‘‘You probably have beds and clothes for your kids at home, even if they don’t live with you fulltime. Make sure that you’ve included the value of those items in your contents calculation when you take out a policy.’’
He said in situations where children were staying at more than one property, the contents insurance would need to be set up to cover possessions that were taken out of the home, too.
‘‘Some cheaper insurance policies will only cover contents while they’re in your home, so make sure to check your policy carefully,’’ he said.
He said big-ticket items, such as laptops and expensive smartphones, were the most likely to present an insurance issue.
High-value items such as sporting equipment, computers or musical instruments may need to be specified on a contents policy if they are worth more than the insurer’s normal limit.
But he said covering them under one parent’s policy should be enough.
‘‘That also helps to ensure that each parent or guardian knows for sure which policy protects their children’s belongings,’’ he said.
‘‘If there are any high-value items that need to be specified, they must be named by at least one of the parents or they may not be covered.
‘‘Insurers may approach the issues slightly differently, so if there is any doubt we encourage parents to talk to their insurer about any high-value items, including whether items are going between two houses and how long they might spend at each.’’
He said that when new, expensive items were bought, parents could discuss how they were covered.
‘‘Make sure it’s clear whose insurance will cover the item if it is lost or damaged, bearing in mind where your child – and the item – normally reside.
‘‘If in doubt, talk it through with your insurer, broker or adviser. If you need to make a claim, you may need to give details of the item or proof of purchase. It’s a good idea to keep receipts or serial numbers and photos – even if you’re not making the claim, the other parent may need them.’’
Terry Jordan, operations manager at the Insurance Council, said it was not something that caused many problems for insurers. But he urged parents to check with their insurers if they were unsure how their policy might respond.
In some cases where policies only cover items within a home, it is possible to add on an extension as a way of getting extra cover.
He said the principle was similar to that of holiday home insurance – if you take items to a holiday home for a short period, they will still be covered under your normal contents policy.
But if you left them there permanently, you would need to take out a separate policy for them.
‘‘If a child lives with their father and then goes to their mother’s house with their laptop and it gets lost or damaged there, that’s covered under the fathers’ policy because that’s where that asset normally resides.’’
In Australia Suncorp Group has recently partnered with Trov, an on-demand insurance platform that allows customers to turn insurance for individual items on or off with an app on their smartphone.
Heath said products such as that might create new ways for parents to share responsibility for their kids’ things.
‘‘In most cases though, traditional insurance products can work for modern families – as long as they know what they’re covered for, and take care to have the right protection in place.’’ Opinion
Irecently contacted my bank about the possibility of paying off a chunk of my mortgage early. We were moving house and thought – wrongly, as it turned out – we might be able to reduce our mortgage in the process.
We asked about paying off $50,000 on a loan we fixed two years ago at 6.25 per cent (not the best decision I’ve ever made.)
The bill, including a $50 administration fee, was to come to $826.54. At the time, it seemed a lot to be charged just for paying back a sum of money we’re already chipping away at each month.
But more people are looking into break fees and whether they are worth taking.
It’s a function of the current interest rate environment: the specials available from banks now make the rates we locked in just a couple of years ago seem very high.
That was noted by the Banking Ombudsman this week when her office released a report that showed a spike in complaints about break fees late last year.
Unless you’re the proud owner of a fully-functioning crystal ball, it is virtually impossible to know whether any rate you choose now will seem a great deal in a couple of years’ time.
People who took out a 10-year rate from TSB last year at 5.89 per cent – described as ‘‘very competitive’’ at the time – are now paying more than the highest fixed rate on the market.
But, in general, if you take a rate that turns out not to be such as good deal, it’s pretty hard to get out of it.
If you want to move house, you can often substitute the security on the loan and transfer it to your new property. But if you’re selling up completely, or just want to move to a better deal, you will be charged a break fee.
This is the bank’s side of the fixed-term interest rate bargain – if rates went up, they wouldn’t pass the increase on to a borrower with a fixed rate. But if they go down, you have to wait until the rate term rolls off to take advantage of that.
The fee for breaking a fixedterm mortgage is usually roughly the difference between what the customer would have paid in interest over what is left of their fixed term, and what another customer would pay for the same money if it was lent out again.
If you have $500,000 fixed for another year at 6.5 per cent, for example, the bank will consider that the most it could get for the same chunk of money loaned to someone else for the next year is about 4.6 per cent.
So the bank might ask to be compensated for the difference of 200 basis points, or about $10,000.
That means, unless you are able to secure a much better deal than the rate the bank thinks they’ll be able to offer someone else, you’ll end up paying pretty much all the savings you stand to make, as a break fee. So what can you do? The most obvious way to get around a break fee is to get another bank to chip in to cover it. Banks will sometimes offer a couple of thousand dollars to entice people over.
You could also add the break fee to the loan. This will give you more cash in the hand each month if your problem is cashflow. But it would prove expensive over the term of your mortgage because you’ll keep paying interest on that added amount.
Probably your best option is to wait it out. Focus on making sure any repayments you agree to work with your budget. If you can, increase your payments to get rid of the loan faster. That’s where the real savings come in.
"Some cheaper insurance policies will only cover contents while they're in your home." Adam Heath of Vero