Should I pay a big break fee to get out of my fixed interest rate?
Many of us fixed interest rate on our home or investment loan a year or 2 ago thinking at the time that rates couldn’t get much better, only to see fixed rates plummeting the last 6 months.
Fixing the interest rate on either your home or commercial loans can give you peace of mind that you know exactly how much you need to fork out every month for your repayment. It’s a great idea if you want to adhere to a budget or know that if there was a rate increase that’s possible with a variable loan, it would mean that the higher repayments would negatively affect your lifestyle.
Anyway, it’s annoying for people who have really high rates now, knowing that at the moment banks are offering 2 and 3 year fixed rates of 2.19% for home loans and 2.49% for investment loans.
For those who want to take advantage of these rates, they need to ask their current bank how much the break fee will be for them to exit their high rate. Surprisingly, it’s often worth paying the break fee as the interest saving exceeds the initial cost.
For example, let’s say someone has a $700,000 loan at NAB that’s fixed for 2 more years at 2.99%. They ask what the break fee is which turns out to be $10,000 – ouch.
But this fee is actually worth paying.
The cheaper rate they could get for the same term of 2.19% would provide a saving of around $5,600 per year. So over the next 2 years the saving is $11,200. Plus, they can get a refinance rebate of $3,000 at a new bank so the savings are much higher.
It’s really important that if you have some loans at a high fixed rate, you do the following 2 things:
- Ask your bank what the break fee would be (if you wanted to get out of the fixed rate and go back to variable rate).
- Call us at iChoice and we’ll email you back an excel sheet detailing the savings you can make, so you can make the right choice.
Here’s a quick video about Break Fees that you can ponder on: