What is a break fee for? What does it mean on my mortgage? How does it work?

 


Often when you have been reading my blogs you will want to increase the repayments on your mortgage.  It should be an easy thing to do.  Not always.

When you go to the bank to ask about increasing the repayments, they will often happily oblige and your mortgage will be repaid quicker.  Great news!

No issue there.  However, often people in my classes find they have been allocating a lot of money to other places.  They now wish to allocate it to pay their mortgage off in order to decrease the term.  Decreasing the amount of interest they have to pay.  Great stuff!

When you fix a mortgage, you have gone under contract with the bank and agree to pay a certain amount regularly to them.  Not rocket science I know.  

As part of that contract, the bank has agreed to hold that interest rate for you for a certain period of time.  This works in your favour when interest rates are rising.

If you choose to pay a lot more with each payment, the bank will miss out on interest they were likely to get, particularly if interest rates are dropping, as happened a few years ago.  During that period a lot of people were wanting to break their mortgage.  If it was set at about 5% and refix at around 2.5%.  The bank would be missing out on a lot of interest, so the break fees were quite high.  

Honestly, I have no idea how they calculate the break fee, but it is always best to ask for an exact figure and how long that is current for.

Now that interest rates are increasing the break fees are not so high.  When you go to change your repayments, or change your mortgage so you have some on fixed and some on revolving or offsetting, you may find there is little or no break fee.

When you approach the bank about breaking your fixed rate, for whatever reason, and you hear the words "there will be a break fee!".  Always ask how much that is.

At the moment this is not such an issue but over the next few years the rates may fall again and some of you who are locked in to a rate over 6% may again have the option to refix at around 4.5% so you will need to understand the concept of the break fee.

Also, if you have a rate at the moment that you have recently fixed at quite a high rate and you want to pay extra each week as (as a result of some of the recommendations in this blog) you have redirected money that was going elsewhere, and the bank says you can only pay up to a certain limit.  Then you can sacrifice the break fee (it might be $20 or it might be $2000 who knows until you ask) to get ahead.  

Do the maths with a bank mortgage calculator online and then send a securemail through your phone banking and ask for it to be done.

Numbers don't lie, there is no emotion in maths, so what you see is what you get.  I love numbers because of this!

I hope this helps you to understand, or at least gives you the appropriate questions to ask.  Feel free to follow, share, or comment/question these blogs.  Have a wonderful day!


Comments

  1. Keith3 May 2023 at 19:53

    Excellent advice as always Sarah .. Love the short animation to set the scene .. You are changing lives!

    ReplyDelete
    Replies
    1. Grannie Sarah's Solutions5 May 2023 at 20:00

      Thanks so much Keith, that means a lot coming from you. I am having a little play with the animation, not entirely happy with it yet, but let's see what happens next. Watch this space!

      Delete
  2. Anonymous4 May 2023 at 10:04

    Thanks Sarah, this is great advice, I also love numbers as they show exactly what you get or can expect over time. I love to budget & set plans for saving over time and it’s amazing how the numbers add up for little weekly increases. Once I apply some of these things in your blogs it will work the same but in reverse for paying down our mortgage. Cheers - Shawn

    ReplyDelete
    Replies
    1. Grannie Sarah's Solutions5 May 2023 at 19:59

      So glad these little snippets are helping you out. you are doing so so well. Have a great weekend.

      Delete

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