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Transcript

Should You Break Your Fixed Mortgage Early? A Cost-Benefit Analysis · That Home Loan Hub

• 0:10
  Speaker 1: Hey everyone, welcome back to that Home Loan Hub.
• 0:12
  Speaker 1: I'm Zibuny Salimova, mortgage advisor, mom of four and someone who's passionate about helping you make smart mortgage decisions.
• 0:18
  Speaker 1: Today we're answering a question I've been getting a lot lately Should I break my fixed mortgage early?
• 0:25
  Speaker 1: It's a big decision and sometimes an expensive one, so let's break it down together.
• 0:31
  Speaker 1: Why would you break a fixed mortgage?
• 0:34
  Speaker 1: Let's start with the why.
• 0:36
  Speaker 1: There are a few common reasons people consider breaking their fixed mortgage.
• 0:39
  Speaker 1: Interest rates have dropped and they want to refinance at a better rate.
• 0:43
  Speaker 1: Life changes, selling the house, separating, relocating, getting married, debt consolidation.
• 0:49
  Speaker 1: They want to restructure the loan and free up some cash.
• 0:52
  Speaker 1: And sometimes people are simply feeling financial pressure and looking for any relief and while it might feel like the right thing to do, it's not always the smartest move unless you've done the numbers.
• 1:04
  Speaker 1: So how are break fees calculated, you'd ask?
• 1:08
  Speaker 1: This is where it gets tricky, because there is no fixed formula.
• 1:12
  Speaker 1: You can Google.
• 1:13
  Speaker 1: Break fees, also called earlierment costs, are calculated based on the interest rate you locked in the time left on your fixed term current market rates at the time you break the amount you still owe.
• 1:26
  Speaker 1: Basically, if the bank loses money by you leaving early, they'll charge you to cover that loss.
• 1:32
  Speaker 1: Sometimes the fee is small.
• 1:34
  Speaker 1: Other times I've seen fees of $10,000 or more.
• 1:37
  Speaker 1: So before you act, you need to ask your bank or an advisor for a formal break cost calculation.
• 1:43
  Speaker 1: And usually when they're given, they're given to be applicable just for that day, because the break fees may change daily.
• 1:51
  Speaker 1: Now when might it be worth it?
• 1:55
  Speaker 1: Here are a few situations where breaking your fixed term can make sense.
• 1:58
  Speaker 1: Interest rates have dropped significantly and you're saving thousands over the new term, even after paying the fee.
• 2:05
  Speaker 1: You're refinancing for a major restructure, like debt consolidation and improving your cash flow.
• 2:10
  Speaker 1: You're planning to sell your property and there is no way to avoid it.
• 2:14
  Speaker 1: You're switching lenders for a much better deal with cash back and a lower rate combined.
• 2:19
  Speaker 1: But remember there are strategic decisions.
• 2:22
  Speaker 1: The numbers must stack up.
• 2:24
  Speaker 1: Now I've got a really cool case study for you here.
• 2:28
  Speaker 1: So one of my clients was fixed at $6.99 for another 18 months.
• 2:32
  Speaker 1: They were struggling financially and wanted to switch to a new lender offering $5.89 and $3,000 cashback.
• 2:40
  Speaker 1: We ran the numbers Break cost was going to be around $4,200.
• 2:45
  Speaker 1: Total interest saved over the next two years was going to be about $5,800.
• 2:50
  Speaker 1: And the cashback they'll get is about $3,000 to cover some of the legal fees and the cashback they'll get is about $3,000 to cover some of the legal fees.
• 2:57
  Speaker 1: Now they will come out with about a benefit of $4,600.
• 3:00
  Speaker 1: In that case braking made sense.
• 3:03
  Speaker 1: But if the rate dropped had only been 0.2% to 0.3%, the numbers wouldn't have worked in their favor.
• 3:10
  Speaker 1: And remember, when there is a brake fee you have to pay it upfront, so sometimes braking is just too expensive.
• 3:18
  Speaker 1: I've had clients excited to chase a new low rate only to find out the break fees would wipe out any potential savings, and more.
• 3:26
  Speaker 1: If your fixed term has less than six months to go, the rate difference is small and you're not under financial pressure, then it might be better to wait it out and refix when your term naturally ends.
• 3:38
  Speaker 1: Now remember this is not a financial advice and if you do need one, go and speak to a financial advisor.
• 3:45
  Speaker 1: Alternatives to breaking early.
• 3:47
  Speaker 1: So before you commit to breaking, ask about a partial repayment.
• 3:51
  Speaker 1: Some banks let you pay a lump sum without fees.
• 3:54
  Speaker 1: Explore top-up loans instead of refinancing the whole thing.
• 3:58
  Speaker 1: So if you want to buy a new car, you don't necessarily have to break the whole mortgage.
• 4:02
  Speaker 1: Talk to an advisor about blended or split loan options.
• 4:06
  Speaker 1: Sometimes we can keep part fixed and part floating to ease your budget.
• 4:10
  Speaker 1: And a final thought breaking a fixed mortgage isn't a yes or no question, it's a numbers question.
• 4:16
  Speaker 1: It can be a smart move if done for the right reasons, at the right time and with the right strategy.
• 4:22
  Speaker 1: But it can also cost you more than you think.
• 4:24
  Speaker 1: And if you're even thinking about breaking your fixed rate, get professional advice first.
• 4:29
  Speaker 1: I'm happy to run the numbers with you.
• 4:31
  Speaker 1: No pressure, just clarity.
• 4:33
  Speaker 1: And that's it for the episode of that Home Loan Hub.
• 4:36
  Speaker 1: If you found it helpful, share it as a friend or leave a quick review.
• 4:40
  Speaker 1: It helps more Kiwis make better money decisions.
• 4:42
  Speaker 1: Until next time, stay smart, stay curious and don't sign anything without reading the fine print.