Managing your mortgage can be a bit of a headache. Many of us just leave the rollovers to the bank, but there can be a huge financial benefit if you cancel your fixed-term home loan to refinance or refinance.
Why would you ever break a loan?
You normally recalculate your loan at the end of your loan term, but it can make sense to break a loan and rearrange it for a long-term benefit. You can refinance your loan if another bank offers you better rates and you can immediately receive a cash contribution from your new bank. To understand if you need to break your loans, we’ve made this handy refinance calculator. I’d recommend giving it a try and if you’re interested in how it all works, read on.
So what are the benefits of breaking?
if interest rates have fallen since you started your loan or are better with another bank, you can save on interest. For example, with a $500,000 loan, an interest rate change of 0.5% per year is a savings of $2,500 per year.*
Money BackIf you move to a new bank, you often get a cashback. This can be a significant value, often about 0.6% of your loan. With the same $500,000 loan, it could be $3,000 in cash immediately. *It is important to note, however, that if you have received a cashback in the past 3-4 years and wish to refinance, your existing bank may reclaim all or part of this cash payment.
There is always a downside
If you cancel a loan early to refinance or if you refinance your loan, you may be charged a cancellation fee. A cancellation fee is a cost that the bank incurs when it terminates a loan with a fixed term and this cost is passed on to you. Just like we get money from the bank, the bank gets money from investors and if they make a loss, that loss is passed on to the customer in the form of a break fee. There may also be a fee for the administration of the fixed break.
In addition, if you refinance, you may be charged an administration fee for the interruption of the fixed rate. You may also incur legal fees to transfer your title to your new bank as security.
To make your decision, you will usually be given the following equations:
Benefits – Cost = Total Savings
(Interest Savings + Cashback) – (Break Costs + Clawback + Banking Fees + Legal Fees) = Total Savings
Interest Savings – Break Cost = Total Savings
So when should you break your loan?
As you will have noticed, cancellation fees are key to the decision to break your loan. You will often find that the cost of breaking your fixed rate loans will be lower at the bottom of the interest rate cycle and on the way up. It is often most expensive to break when interest rates fall. Refinancing or breaking your loan is part of a broader financial strategy – it may work for now, but make sure it makes sense in the long run!
Try the break allowance calculator and if the costs are low enough, get in touch to refinance your mortgage.
*It is important to note that the examples in this article are only indicative and actual savings may vary.