When you take out a fixed rate home loan you’re locking in an interest rate for a certain time frame. These time frames are usually between 1 to 5-years, but 10 and 15-year fixed rate home loans are also available in Australia.
Fixed rate home loans often give home loan holders peace-of-mind as their home loan repayment remains consistent from month-to-month. This means that budgeting is easier and that, in many cases, home loan repayments are more affordable when variable interest rates rise.
However, fixed rate home loans are only ideal for home loan holders who are staying in their home for the duration of the fixed rate term. If you are thinking of selling in the near future, then a fixed rate home loan is not for you as the break fees and other costs associated can be expensive.
The most common costs you’ll encounter when breaking a fixed rate home loan are break costs, discharge and exit fees. Let’s look at these in greater detail.
Fixed Rate Home Loan Break Costs and Other Fees
If you wish to break your fixed rate home loan term before it’s ended then your lender stands to lose money from the deal you’ve made. To recuperate this value your lender will charge you a number of costs and fees. These are as follows:
Break Cost – This fee is calculated by determining the difference between the official cash rate at the time you took out your home loan and the current market rate. Your lender will then use this to calculate if they will lose money by re-lending your funds at the current market rate. If they do then you’ll be charged the amount that they’ll lose. For example, let’s say you fix your home loan rate for 5-years at 7.75 percent. You break the loan term after 2-years on a loan balance of $200,000. The total amount of interest you would’ve repaid over the loan term was $42,284. Your lender can relend your loan value for 5.25 percent, which will earn them $30,532 over a 5-year term. Therefore the break fee you’ll pay is the value your lender stands to lose, which is $11,752.
Discharge Fee – This is an administration cost that a lender is charged, which they then typically pass-on to a borrower. This can cost up to $400 in some cases.
Exit Fee – A fee that is charged to exit a home loan. If you took out your loan before July 2011, then you may have to pay this fee, which, in some cases, can be thousands of dollars. However, any home loans taken out after this date are now exempt from exit fees due to government legislation passed to allow borrowers greater freedom when switching lenders.
Do you want to know more about fixed rate home loans? Then contact eChoice and find the right home loan for YOU today.