Couple break mortgage for superior deal
Others warned hefty penalty fees may mean switching banks isn’t worthwhile
An Auckland couple will save at least $4000 on their annual mortgage repayments after breaking their fixed-term contract early and signing with a new bank.
And a mortgage broker says she has been inundated with inquiries from homeowners looking for better deals since the Reserve Bank slashed the official cash rate (OCR) to a record low 1 per cent last week.
But a financial columnist is warning those considering breaking their fixed-term contract that bank penalty fees may mean it’s not worth it.
Cameron Mackenzie, who works in the shipping and logistics industry, said he and wife Sarah bought their Glen Innes property about five years ago. After watching rates drop for a number of years while their fixed-rate remained unchanged, he sought advice from a mortgage broker.
“By sticking with my current mortgage rate, which was about 4.89 per cent, I was losing over $4000 a year by not fixing the current mortgage rates which were at the time about 3.89 per cent,” he said.
“It made me wake up . . . we needed to figure out how much it was to
break and find a bank who was willing to match the break fee or close to it.”
With the help of Loan Market mortgage adviser Megin Wilton, the couple gained a lower mortgage rate this year with another bank. They also struck a deal with their new bank, Westpac, which meant the break fees would be paid to the outgoing bank, ANZ.
“We will definitely chew through [our mortgage] a bit faster with our new finance,” Mackenzie said. “Hopefully, we can knock it off within the next 10 to 15 years.”
Wilton said an incoming bank might offer a cash contribution to help homeowners alleviate the outgoing bank’s break costs.
Since last week’s shock OCR drop, she’d been swamped with calls from clients asking if they should break.
People with settlements looming were asking if they would benefit from the rate cuts. Wilton said it was hard to judge because the OCR cut didn’t mean banks would follow suit.
“For Cameron, it was better to break prior to the OCR so the break costs wouldn’t have been higher and
We needed to figure out how much it was to break and find a bank who was willing to match the break fee. Cameron Mackenzie
it worked out more beneficial for him,” she said. “The rate that he’s got now is in line with the discounts that the banks have been giving after the OCR as well.”
John Bolton from Squirrel Mortgages told the Business Herald last week it “generally” didn’t pay to break a mortgage.
“The break cost that the bank is going to charge you will largely offset the benefit from breaking,” he said.
“If I thought rates were going up it might be an opportunity to break but given the expectation rates could fall further between now and the end of the year, I’d just hang out and wait.
“Most people are on relatively short-term fixed rates anyway and a lot of people have the loan split so, generally speaking, most people will be able to take advantage of this shortly.”
Personal-finance columnist and author Mary Holm said break fees varied widely. It depended largely on how much the lender stood to lose.
“Generally, if you are going to gain a lot by moving to a much lower interest rate for quite a long period, the break fee will be high. Your gain is the bank’s loss. So it will probably not be worth doing. And if you’re going to gain just a bit, it’s probably not worth the hassle.
“Still, it doesn’t do any harm to ask.” New Zealand Bankers’ Association chief executive Roger Beaumont declined to say whether banks had seen a surge in people paying break fees. But he said of breaking a fixed home loan: “It’s a good idea to calculate the potential interest rate savings for the balance of the fixed period against the break cost.
“Then you can make a carefully considered decision and not just chase a cheaper rate.”