Is It Worth it to Break a Fixed-Rate Home Loan?
Last updated on December 9th, 2022
Find out if it is worth it to break a fixed-rate home loan in 2023. Given the record interest rate rises in 2022, it may be worth asking the question and investigating is it worth it to break a fixed-rate home loan?
A fixed-rate home loan is a mortgage loan that has a locked-in rate for a fixed number of years. On the other hand, variable-rate home loans fluctuate with the changing rates over a fixed time.
There are certain terms and conditions that come with a fixed-rate home loan contract. Therefore, if the borrower goes against these terms and conditions, he breaks his fixed-rate home loan.
Here are some of the common ways with which borrowers can break their fixed-rate home loans.
- Transferring to another lender
- Switching to another home loan product
- Refinancing the mortgage
- Paying the loan completely before the term ends
- Paying extra on the home loan repayments, which goes beyond the cap specified in the contract
Are there Benefits to Breaking a Fixed-Rate Home Loan?
Not even financial experts can exactly predict what will happen to the market. The economic market can shift in a blink of an eye, affecting the financial circumstances of everyone.
In some situations, breaking a fixed-rate loan can be beneficial. However, before doing so, it is prudent to speak first with a financial adviser or a home loan specialist.
Some of the possible benefits of breaking a fixed-rate loan include the following:
- Getting access to a lower interest rate than the one the fixed-rate loan has locked in
- Variable home loans give borrowers access to added features, such as 100% accounts, redraw facilities, no break fees, and unlimited extra repayments.
- Splitting the loan into variable and fixed-rate loans gives the borrower access to the benefits of both loans
- Locking in a lower rate as the fixed-term mortgage nears the end of the term before the rates increase
What are the Disadvantages of Breaking Your Fixed-Rate Loan?
Breaking a fixed-rate loan may mean having to pay for break costs. It is the reason why it is a wise idea to seek the advice of financial or mortgage experts before breaking a fixed-rate loan.
The following are the common drawbacks of breaking a fixed-rate loan.
- Paying for the break costs.
- There is no certainty on how much each monthly repayment will cost.
- There is a possibility of higher repayments if the current rate is higher than the rate previously locked in.
Why Do Lenders Charge Break Costs to Borrowers Who Break the Loan’s Terms and Conditions?
Now the big question. Why do lenders even charge break costs in the first place? Once a borrower locks in a fixed-rate loan with a lender, the latter will source the funds at wholesale interest rates.
For it to work for both lender and the borrower, the borrower is expected to stick with the loan’s terms and conditions until the end of the fixed term.
For instance, the borrower has extra cash and makes an extra repayment. As a result, it changes the wholesale rate, and the lender may incur losses. Break costs are therefore added to compensate for any losses that the lender may incur due to the borrower not doing as agreed in the contract.
How Much Will Your Break Fees Cost?
The answer depends on the lender that provides the fixed-rate loan. Lenders use different formulas and include varied considerations when computing the break costs.
How fees will be computed should be included in the loan contract. If anything is unclear, checking with the lender is highly recommended.
The factors considered in computing the break costs usually include the following:
- The time remaining in the fixed-rate period
- The locked-in fixed interest rate as compared with the current market rate
- The loan amount
Before deciding to break a fixed-rate loan, it is necessary to evaluate all options first. Doing so will help in making an informed decision.
For more tips on managing your loans, Speak to a mortgage broker today >.
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