- Hi, I am new in this forum & would like to get some opinion from the forum.
Currently I have loan with fixed rate at 6.49% for 5 years since Mar'06 & now I want to change into variable. because I am going to sell my house. When I call & ask the bank they want to charge me a huge penalty for the remaining 2.5 years.
The bank said when in Mar'06, the whole sale rate was 5.83% & now the wholesale rate is 4.39%, so practically they want to charge me 3.3% (1.5% pa for the remaining 2.5 years) for break the contract.
In Mar'06 when I enter the contract the reserve bank rate was 5.25% & the same like now, But how come the current wholesale rate can be 4.39%. and also why my bank still charge 7.12% fixed rate for 1 & 2 years.
I can't understand.
Do anyone in the forum understand or know about the current wholesale rate.
Thanks,
If you are trading in a loan on a lower rate of interest than is currently available you are doing the bank a favour ie releasing cheaper funds – they should be paying you the difference not the other way around. From what you are saying if wholesale funding costs are so low at present why are they not reducing the loan rates (other than scarcity of funds) – if you can get them to put their wholesale cost of funds in writing, take it to your mate in canberra Wayne (or better yet Joe Hockey) and get them to have a stoush with the banks. From what you are saying, the interest rates should be lower (as the banks are maintaining that the costs of funds are well in excess of the reserve bank rates).
Hi MCB1 – and welcome to the forum.
A touchy subject indeed at the moment – and one that to put things in perspective, everyone with a fixed rate loan needs to recall a couple of things – such as why they got one in the first place, have there plans changed since then (such as not keeping house 'indefinately' ) and how would they feel if rates were still going up.
Your is still an excellent rate – even in todays market – so you have saved a heap of money in the last couple of years over IF you had been in a variable rate loan – rmemeber that.
However…….I feel you (or your lender) may be getting 'wholesale rate' confused with 'cost of funds' – which is different.Economic cost on a fixed rate loan is a complex beast, which is why no one can give you a quote at time of application – to many variables.
Believe it or not, the rate can even take into account market sentiment – ie same rates and 'cost of funds', but varies according to if rates are considered 'stable', on the way 'up', or on the way 'down'.
Wont go into any more detail, and I appreciate that circumstances can change for people – literally over night – so without knowing more about what you are trying to achieve, can I give you a couple of optionS!
If buying another property, your fixed loan is likely to be transportable – ie, you can do a security swap with your current loan, and pay extra as required (or take out a top up variable rate loan)
If you are, but have no immediate place chosen, some of the better lenders (would have to be a bank to do this) can 'offset' (ie – keep) an amount of cash from your sale in a term deposit until the loan expires, or you find your next property – this offsets the fixed rate loan, and avoids the heavy break costs.
Unfortunately, if you are selling with no plan of doing anything else, the only options are to take it on the chest as a cost of doing business, or dont sell at this time.
Most loans are likely to have an economic cost to exit of anything from $10k and upwards in the current market – (ie – quoted someone $13500 to exit a 10 year fixed loan @ 7.69% for $190 with 9 years to go just last week) In its simplest terms, & very generalised, most fixed rate loan funds come from the 'money markets', (which is where all the doom and gloom is on the news at present) whereas variable ones are more likely to be sourced from deposit funds taken over the counter at banks. Perhaps that gives you a better idea of why these costs are incurred – it is like reneging on a fixed price 'IOU".
All the best with whatever you work out – I'm sure you will find a lot of great practical info on this forum.
Cheers
Hi v8Ghia
Thank you for your submission on this thread as it has become a hot topic recently.
If you or anyone can help me understand the predicament we are in that would be appreciated…
We fixed when interest rates were going up as we have a baby and an investment property on a variable interest only set up.
The fixed rate loan was on our mortgage and is around $255k. We now wish to sell the house (something at the time we had never thought of, and you wouldnt in a rising interest rate market) and borrow a total of $500,000 yet our lender wants to charge us around $18k to break it.
They have offered to continue with that portion but at that rate fixed for the next 3 years (8.2%) and set up the remainder of the borrow at the current variable rate. This unfortunately does not become viable to us as it is simply not affordable paying $255K at 8.2% and $245k at 5.75%. If the whole lot was at 5.75% then yes it is affordable.
We are even willing to accept another fixed rate of 5.00% (if and when it ever gets there) and wouldnt mind in the slightest if it went to 1%!! as we are comfortable with the home we are intending to buy and the proposed repayment amount.
The wholesale rate comparison that the banks use, where can one find it for the calculations needed to see whether this quoted figure is correct or not?
You would think that a borrow of an extra $245K would be sufficient to waive a $18K break costs considering the amount of interest over a 30 year loan on the extra $245k is $228K!!!!!!!!!!!!!!!!!!!!!!!!!!
Any thoughts?
TheGlassy
Hi Glassy – welcome to the forum too….
More than happy to give you a bit more info.Dont take it the wrong way (please) but I must reiterate, that if rates were still rising, or had levelled off, you would be happy I'm sure. And…..possibly you would then not be able to afford the $500k now you are looking at for your new house.
What the lender has offered you, keeping the exisitng loan, and then getting another as a variable is the best way to go, and of course you can average out the two rates in a sense for your true rate on the whole $500k.
Can I put the scenario back to you, that if as you say you cant afford the loan, but if it was @ 5 or 5.75% you could, do you realise that if you did have the whole lot fixed in for a few years, and rates had gone up (which they will again I'm sure in the next few years) when your loan comes off the fixed rate, it will go to the standard varaible rate at the time, which then may be 7.5% as an example, or even higher – if you cant afford that rate, you have to sell (lose your home) or live very frugally……..at the moment lenders are still assessing new homeloans at a much higher 'rate' than the actual rate, simply for this reason, to make sure people are not over committed Glassy.
Unfortunatetly, you wont find a break cost like this waived, as it is one of the few actual costs not actually 'made' by the bank – ie the bank or lender actaully has to pay that amount of money (or it costs them that amount of money) if the lan contract is broken.
It is a contract – and based on the assumption that whoever lends the funds will get the money all agreed on.
I guess it is like a car lease – if you want to pay a vehicle lease out early, you still have to pay the whole amount as if you had made all the repayments.
I know it sounds like a lot of money, and it is a complex process to get your head around, but essentially fixing a homeloan (I have one fixed loan, and am about to do another) should be done purely as a way to aid your budgeting, or if you are comfortable with the rate of the day, as opposed to the risk of it rising – fixing a loan to purely try and 'beat the market' will more often than not backfire.
Rmember how long you have your home loan for – and try and look long term, not just at these 'record low' rate at the moment.If you simply must have your new home, I have a suggestion or two.
Perhaps look at the option of having the extra variable loan as interest only, and then any extra you have pay of the fixed portion instead. This will save you interest, as you will be paying less at the higher rate. Most lenders will allow you to pay some extra off your fixed loan without penalty.
Also, use an offset savings account with your new loan, and make sure all your pay, income, etc gets paid into this account, and left there for as long as possible, to minimise the interest you pay on your loan.
The only other suggestion……..cheaper house!All the best with whatever happens!!!
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