What Are The Exit Fees On Fixed Rate Mortgages?

With the Australian government looking to tighten exit fees on variable rate mortgages, and more people considering fixed rate mortgages, it is an excellent question and a great time to look at possible exit fees or early repayment fees on a fixed rate mortgage.
The big difference between a fixed rate and variable rate mortgage, is that the fixed rate mortgage will have a term (ranging from 1 to 15 years), where the interest rate is fixed, it won’t go up or down if variable rates move. When most banks or lenders enter into a fixed rate mortgage contract with a customer, they may purchase the funds for the mortgage on the longer term money markets. These are called Wholesale Interest Swap Rates. These rates are very volatile and can change daily.
So if you have a fixed rate mortgage, the funds to secure that fixed rate were secured when your home loan settled. The Wholesale Interest Swap Rate may of been higher or lower than today’s Wholesale Interest Swap Rate, this is where the bank may calculate the interest difference, if you want to pay your fixed rate loan out.
They will look at the Wholesale Swap Interest Rate when you took your fixed rate loan out, look at the remainder of your fixed rate mortgage term, and calculate the difference, this may be your early repayment fee, as the bank or lender is passing on the cost to the customer, if the Wholesale Interest Swap Rate is higher (this differs between the banks and lenders various policies).
Lets look at an example of a possible early repayment fee on a fixed rate mortgage. In this example we will look at a 5 year fixed rate loan of $200,000, fixed in December 2008. Lets say in this example, you have made minimum repayments, so you still owe $190,000 on your mortgage.
The $200,000 home loan was fixed for 5 years. The Wholesale Interest Swap Rate was 7.0% at the time the loan was fixed.
You want to pay your fixed rate homeloan out today, as you have sold your house. The Wholesale Interest Swap Rate today in our example is 4.0%. You have 3 years left on your fixed rate component of your home loan.
As you want to pay the home loan out in full, the bank will look at your current balance (minus any adjustment for scheduled principle reductions during these first two years), in our example this is $190,000.
The bank or lender will look at the Wholesale Interest Swap Rate at the start of the fixed rate loan term, in our example this was 7.0%. They will then look at today’s Wholesale Interest Swap Rate, in our example we have used 4.0%. The difference between the two is 3.0%.
The bank or lender will then calculate this over the remainder of the 3 years left on your fixed rate mortgage, based on your current balance of $190,000.
$190,000 * 3.0% * 3 = $17,100.
This $17,100 maybe your fixed rate early repayment fee. The bank or lender passes this cost on, as they maybe paying that fee too. It is recommended to contact your bank or lender, to find out your early repayment fee, before you make any decisions on whether you will pay out your fixed rate mortgage.
There also maybe other costs associated with paying out a fixed rate loan. A deferred establishment fee may apply, plus government charges.
If you are thinking about a fixed rate mortgage, it is important to consider the possible cost, should you need to close the fixed rate home loan during the fixed rate term. It is impossible to work out what an early repayment fee will be in the future, as they are based on the Wholesale Interest Swap Rate, which are volatile and may change daily.
If you are thinking about buying another home and selling your current one, there are ways to avoid this fee. You may be able to port (secure or transfer) your current fixed rate loan to your new property, saving you the early repayment fee. You may also be able to secure the fixed rate loan against a term deposit (usually the term deposit has to be the same dollar value as the loan), if you are not purchasing another property straight away. You will need to speak a mortgage broker or your current lender, to see if these options are available to you, as they will depend on your personal financial position and your current bank or lender.
All banks and lenders may work out their early repayment fee differently than our example. It is important to seek information from your bank or lender to find out what your early repayment fee maybe if you are thinking about closing your fixed rate homeloan.
If you have any comments or questions, please leave them below. If you would like more personal advice, please contact me anytime.