Should you break your mortgage?

If your mortgage is on a fixed term, you might be studiously avoiding looking at the interest rates currently on offer.

What looked like a good deal a year ago, when two-year rates were just over 5 per cent, might not look such a bargain when banks are offering less than 4 per cent.

Most banks will let you break a fixed term to move to a cheaper offer, but in most cases you’ll be charged a break fee.

How much that costs depends on how long you have left of the fixed term and what the bank could lend the money to a new borrower for. Generally, you end up paying roughly what you save by switching in a break fee. But sometimes it can pay off.

Broker Glen McLeod, of Edge Mortgages, said it was a question worth asking.

He said, in some cases, people were able to negotiate a ‘‘cash back’’ deal from a new bank if they moved their business, and that could be used to pay a break fee.

‘‘What I say to each client is that we need to work out if it will be worthwhile to break the loan.

‘‘Will they recover the break cost in payment reduction over the time period? Or will it just come out even? Did they get cash upfront from the bank they are with?

‘‘We run through all of these questions and run the break cost through a calculator to see if it works. The break costs are paid upfront by the client and cannot be added to the loan in most cases. If the client has no cash back clawback and the calculations work, we will look at options both within the existing provider and other lenders,’’ he said.

‘‘Sadly, some people just see the rate and do not realise the inherent cost of breaking.

‘‘What also needs to be taken into account is what economic factors are ahead of us. Would refixing for a longer or shorter period be more beneficial?’’

Banking expert Claire Matthews, of Massey University, said it usually needed to be a substantial saving in interest rate to make breaking worthwhile, or the loan would have to be near the end of a fixed term.

‘‘It is quite difficult to do this calculation in general terms, because it really does depend on the specific details of what the current fixed rate is, what the new fixed rate would be, the remaining term on the current fixed rate, and the break cost,’’ she said. ‘‘In addition, there may be other factors that mean that despite there being a financial cost to break the fixed rate the non-financial benefits make it worthwhile.’’

Research from Canstar showed it could sometimes pay off.

The research house took the example of a borrower who took a two-year fixed home loan rate six months ago and locked in a two-year rate of 4.52 per cent, the average at the time.

If this borrower switched to the minimum two-year fixed rate of 3.99 per cent currently available on the market, and paid a break fee of approximately $1800, they could save more than $1300 because of interest cost savings.

However, if they switched to the average two-year rate of 4.37 per cent, while they could save $878.94 in interest charges, by incurring a $1800 break fee they could be worse off by $921.06.