Fixed mortgage rate pain

01.Case study

Tony is halfway through his five-year, fixed rate home loan, paying an interest rate of 7.35%.

Last October, when variable rates fell, he considered changing to a variable loan and was told by the CBA that he would be up for a break fee of $1900. Tony asked his bank how it calculated this fee but got no response. When he checked the fee about three weeks later, it had increased to $34,000.

A CBA spokesman told CHOICE: “Prior to 28 October we weren’t calculating our loss correctly, therefore we weren’t recouping the right amount from the customer and the error was massively in the customer’s favour … If the customer had chosen to break his fixed term on 23 October, we would have under-charged him by just over $20,000.” The rest of the difference was attributed to changes in the wholesale rate between Tony’s first and second request.

When you lock in your rate your bank borrows money from the wholesale market. When you repay early, the bank needs to reinvest or relend the money at rates current at that time; if wholesale rates are lower than when you fixed the loan, the bank makes a loss and recoups the money from you.

Fixed rates have now come down to about their lowest point in the past 10 years (see the graph below).

Steps to take

A fixed rate can help you budget as it provides security over the amount you need to repay. If you’re considering a fixed rate, take these steps:

• Check if the lender allows you make extra repayments during the fixed term, such as $10,000 extra per calendar year.
• Consider locking in only part of your loan, which is called a split loan.
• Ask the lender for an example of the break fee for your loan amount at a range of different interest rates in the future, such as if wholesale rates were 1%, 2% and 3% below today’s wholesale rates.
• If you want to break a fixed loan later on, ask your bank for the fee and make sure they give you a deadline, as it usually only applies until the end of that business day.

If you have a complaint about your lender, contact the Banking and Financial Services Ombudsman at www.bfso.org.au, or phone 1300 78 08 08.