Hi All,
I'm new to this Forum and I have not much financial knowlege. Could any guru advise me if the break cost I got from Bank is reasonable?
By now I have loan (185K) with fix rate at 8.45% for half year since June this year and remaining 2.5 years. I want to break it to variable rate as I'm worrying that RBA will keep cutting interest rates in Feb and March. When I called Bank to enquire how much it would cost me two weeks ago, they delayed me to reply me for a week and I got reply last Monday (15 Dec). It says break fee is 18K. However, they issued latest interest rate by reducing 1% at the same day they gave me reply.
I'm wondering if it should be much less before they issued new interest rates as I ever enquired same thing two month ago, the break cost was only 10k. I asked them to re-calculate the break fee subject to the date before new interest rates were issued. They told me only 1k differece i.e. 17K for breaking fixed rate and they told that it's relating to wholesale market. I'm not sure if it's reasonalbe. I brief the whole procedure below, could any guys could explain for me:
Mid of Oct, bank decreased 55 points of their variable rate, break cost was 10K;
Begining of Dec, RAB published 100 points cut but Bank has not published, break cost was 17K;One week later, Bank published 100 points cut as well, break cost was 18K;
Today, I enquired again, the break cost is 19.5K so far.
I really can not understand how it works and whether or not I need to ask for further explaination of their calculation methodology? But for now, they refused explain further, they said they did not know much as well.
Thanks in advance,
Tom
I think the calculation method is outlines in your loan documents. If not, ask them how it is calculated. It will be complex, but they should tell you how they work it out.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Terryw for your reply. Actually there's only a DEF (deferrred establishment fee) is clarified in documents, which is $1000. But the calculation method of break cost is not outlined. When I asked them for the calculation method, they only said that it's complex and it's wholesale market rates related, and they didn't know how to calculate also. What they could do is send request email to their relevant department of headoffice and inform me the result when they get reply.
At the moment, what I want to know is that based on rule of thumb, is calculation method only based on wholesale market interest rates or the bank variable rate is also a key factor?
Tom
Hi Tom
They are correct it is not a simple straight forward calculation and each lenders terms and conditions will differ.
Normally it would be based on the economic cost of the Bank having to relend the same funds in todays climate and the shortfall.
Assuming that the variable rate comes down to 5.45% then this would be a 3% saving to your current loan. On an amount of $185,000 this would save you $5550 per annum so at circa $18-19,000 you wont save anything over a 3 year period. In additional if rates where to fall further then the cost to break the loan will also increase.
I would suggest on the surface you stay put and use the equity in the property to invest elsewhere in a positve geared property or similar.
Richard Taylor | Australia's leading private lender
Thanks Richard, your explaination is clear for me and no doubt that they don't show me details of calculation method. I understand that it's complex pretty much. However I'm wondering if something is unreasonable, I narrow down my case as below few lines:
1) 15 Oct. variable rate: 7.88%, break cost: $10000 (got reply within 3 hrs)
2) 10 Dec. variable rate: 7.13%, break cost: $17000 (got reply in a week)
3) 15 Dec. variable rate: 6.13%, break cost: $18000 (got reply within 3 hrs)
4) 22 Dec. variable rate: 6.13%, break cost: $19000 (go reply in within1 hrs)I raised my request on 8 Dec to query the break cost but got reply on 15 Dec, when they issued new rate 6.13%. I argued them why delayed my request a week? They said sorry to me and also told me no big difference between two weeks. I dont understand why 1% reduction of variable rates had no big impact on the break cost.
I was going to query break cost on 8 Dec and get reply on same day and then made a decision if I would break my fixed rates because I have predicted the bank must decrease the rates in one or two weeks. Almost everytime, it cuts the rates 2 or 3 weeks later after CBA published new rates. However I got reply late for a week especially I called them and physically got in their office to follow up totally more than 4 times. It's unbelievable and unacceptable. It's another story but it's why I suspected if such break costs are reasonable.
Thanks once again for your explaination and hope you all have a merry Christmas and a happy new year.
Tom
yopoli wrote:Thanks Richard, your explaination is clear for me and no doubt that they don't show me details of calculation method. I understand that it's complex pretty much. However I'm wondering if something is unreasonable, I narrow down my case as below few lines:1) 15 Oct. variable rate: 7.88%, break cost: $10000 (got reply within 3 hrs)
2) 10 Dec. variable rate: 7.13%, break cost: $17000 (got reply in a week)
3) 15 Dec. variable rate: 6.13%, break cost: $18000 (got reply within 3 hrs)
4) 22 Dec. variable rate: 6.13%, break cost: $19000 (go reply in within1 hrs)I raised my request on 8 Dec to query the break cost but got reply on 15 Dec, when they issued new rate 6.13%. I argued them why delayed my request a week? They said sorry to me and also told me no big difference between two weeks. I dont understand why 1% reduction of variable rates had no big impact on the break cost.
I was going to query break cost on 8 Dec and get reply on same day and then made a decision if I would break my fixed rates because I have predicted the bank must decrease the rates in one or two weeks. Almost everytime, it cuts the rates 2 or 3 weeks later after CBA published new rates. However I got reply late for a week especially I called them and physically got in their office to follow up totally more than 4 times. It's unbelievable and unacceptable. It's another story but it's why I suspected if such break costs are reasonable.
Thanks once again for your explaination and hope you all have a merry Christmas and a happy new year.
Tom
I think you'll find the relevant rate the bank uses to calculate the break costs is their current fixed rate or swap rate, not the current variable rate.
Hi Yopoli,
WHile the delay may not be good, bear in mind a lot now are only honouring any quote for a week maximim – and by the time you had new loan docs prepared, and executed, and returned, that is well over a week – and rate would be different again,
The lender may be being inundated with these requests, but ideally you shoudl certainly not have to wait a week for a reply.
You will notice fixed interest rate loans with most if not all lenders vary from week to week, whereas we only hear about 'standard varaible rate' on the news etc – so the economic/exit costs do fluctuate.
Most lenders will have a brochure explaining economic costs, and many have updated info on their websites now to assist with explaining what is a tricky and sensitive topic.
As already mentioned – sit this one out….and look long term.
Cheers
It is interesting to note that there are about 6 different borrowers who are before the courts challenging the validity of the "break costs" charged by financiers.
I know that it does not answer your question, but just thought you would be interested to know.Ben
I think you may actually find they are challenging the validity of the Deferred Establishment Fees or Early Repayment Fees and not the Fixed Rate Break costs.
Richard Taylor | Australia's leading private lender
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