Breaking fixed loans benefits some borrowers

By Terry Ryder, 1st October 2009

An opportunity to break a fixed home loan has arrived for some Australians who locked in a high rate last year, according to financial comparison website RateCity. Even with break fees, many Australians could be substantially better off, it says.

Many Australians who fixed between March and October 2008 are still paying around 9% on their home loans and monthly repayments for a $300,000 loan would be about $2,520.

If they switched to today’s average variable rate of 5.5%, monthly repayments would be about $885 less. And compared to a three-year fixed rate loan at today’s benchmark of 7.03% repayments would be about $400 less.

RateCity CEO Damian Smith says there are opportunities for these home owners to make significant savings.

“Those Australians who locked in a fixed rate last year could find themselves much better off if they compared current rates on the market,” he says. “As fixed interest rates have been rising since April and variable rates have stayed low, break fees to cancel fixed home loans are the lowest they have been in almost a year.”

Break costs vary between lenders but are generally calculated by the amount of interest the lender will lose from terminating the contract before the fixed period is finished.

For example, if a borrower started a three-year fixed home loan at 9% in August 2008 and had $300,000 left on the loan, the lender would calculate the remainder of the two years fixed period by either their current two-year fixed rate or the Money Market rate. For this scenario, if the lender chose to deduct their current two-year fixed rate of 6.6% from the 9% rate, the borrower would be charged the difference (2.4%) for each year remaining.

This would equal 4.8% of the $300,000 loan balance, which is a $14,400 break cost.

“The current average variable rate for a typical $300,000 home loan is about 5.5%, which means they could save $885 each month or over $10,000 a year by switching from last year’s fixed rates to a variable rate,” Smith says.

“After paying the $14,400 break cost for the above example, they could still be about $8,800 better off after just two years with a variable interest rate.”

ENDS