Breaking your fixed mortgage term and moving to a lower interest rate may seem like an easy way to improve your cashflow. But in reality it could be a very expensive trip to the bank.
22 March 2009
Here are the three key issues you need to consider before you go any further.
1. How much will it cost to break my fixed term? You need to contact your lender or mortgage broker to find out exactly how much it will cost to break your term. There will be a "break fee" and possibly an administration fee to pay.
Before you talk to your lender, check what your mortgage document says about the fees that will be charged and how these are worked out. You’ll find this information under the heading "Early Repayment".
2. Can I add the break fee to my loan? You may be able to add the break fee to your mortgage rather than paying it up front.
Right now, lenders generally aren't willing to lend more than 80% of a property's value. So adding the fee to your existing mortgage may take you beyond this level. It may also require you to pay "mortgage indemnity insurance" – which could be thousands of dollars depending on the size of your loan.
You also need to consider whether increasing your long-term debt is worth the short-term benefit of reduced mortgage repayments.
3. Is it worth breaking the term? To answer this question you need to look at the cost of your borrowing, not just the cost of your regular repayments. Ask your lender to show you: • How much interest you will be paying from now till the end of your current fixed term. • How much interest you would be paying over that period with a lower interest rate (but an increased loan amount due to the addition of the break fee and other costs).
What is the difference between the two figures? Will it cost you more to pay the break fee or continue with your fixed term?
Breaking your fixed term isn't something to rush into. Avoid making your decision solely on frustration over falling rates.
Talk to your lender and get the information you need to weigh up all the costs involved.
