The fee is called a “mark-to-market” fee and is hidden in the small print of all bank mortgage documents. It is a calculated fee that is based on the size of the mortgage, how far interest rates have fallen since it was fixed, and its remaining fixed term when it is repaid. The penalty fee is complicated but roughly equates to $1,000 per $100,000 borrowed for every 1% fall in rates, and for every year of its remaining fixed rate term. So if interest rates fall by 2%, a customer with a $400,000 mortgage on a five-year fixed-rate with three years still to go will face a penalty fee of around $24,000! As a general rule, customers won’t financially benefit from breaking fixed rates and refinancing when interest rates are falling. The prepayment fee will offset any reduction in interest paid. However, there are some exceptions to this rule!
If your mortgage is with ASB, BNZ, National Bank or Sovereign - and you have over two years left on your mortgage - then you may still financially benefit because long-term fixed rates are so high. However, to benefit you need to be comfortable putting your mortgage on a floating rate, or on low short-term fixed rates. If your intention is to simply fix long-term then there won’t be a financial benefit and we'd advise against breaking. We calculate your savings as the change in interest you pay over the remaining fixed term of your mortgage less the penalty fee (that you need to pay upfront to break the mortgage.)
If your mortgage is on an investment property, then the break fee will be tax deductible. Breaking the mortgage can be a good way of bringing forward tax losses. The lower rates also give your property a better chance of becoming cashflow positive. Breaking your mortgage now gives you the opportunity to lock in low long-term rates. That said, our view is that long-term rates are currently priced too high. They could fall slightly over the next two to three months as more consumers adjust to using floating rates.