Rising Tide Blog

Are you trapped in your fixed rate?

Posted by Sam Gawenda

read ( words)


Interest rates have dropped significantly over the past few weeks. And if you’re locked in to a fixed rate period over the last couple of years, you may find you’re paying over what is available in the market as of today.

The question is, are you trapped in your fixed?

You can always pay out a fixed rate early. However, that will incur a break cost. How a break cost is calculated is based on the remaining fixed term contract, the loan size and what your fixed rate interest rate is and what the interest rate is as of today. Those factors will determine how much your break cost is, and these fees can be significant. I had a client just recently, yesterday in fact, get break cost from their bank was going to cost them $14,000 to break their loan.

Now, the banks have been really proactive in supporting Australians through what we’re facing. One thing that I’d certainly ask the question, and I know the industry have been asking the question of the banks is, will they consider waiving these break costs in order to help Australians move on to lower interest rates and lighten the cashflow burden that so many of us are facing? And the answer’s been in very astounding – NO they will not. And my gut tells me that that will be a firm stance.

So are you trapped in your current fixed rate? The answer is no, you’re not. You can opt to break that fixed but you will pay a fee.

Now, can we justify paying the fee to move on to a lower interest rate with a different product? And the answer is it’s completely subjective to your circumstance.

The steps to working this out is – first step is calling your bank and getting your break cost. What it is going to cost you to break your fixed term interest rate. And let’s say hypothetically, that’s $10,000. And let’s say hypothetically, you’ve got two years to run on your current fixed rate. What we need to do is we need to find a loan product that if you were to break your current term, and pay that break fee up top, that you’re going to recoup that $10,000 over that next two year period. So, there’s a number of lenders that are currently offering refinance rebates right up to $4,000. So if its going to cost us $10,000 to break the loan and we’re getting $4,000 upfront, we need to we need to be confident that we’re going to save $6,000 in interest over the remaining two years. Now, it’s quite an easy sum to calculate. We just need to have all the information. Now in terms of that break fee. You would be paying that $10,000 upfront depending on your situation, if you’ve got equity in your property and the borrowing power to be able to do it, we could add that $10,000 to your loan.

So, to answer the question, are you trapped? No, you’re not. Potentially, no you’re not, depending on your specific set of circumstances. But please follow for the link, lock in a time to chat and let’s see if we can get you in a better position.