Servicing Melbourne, the Mornington Peninsula and wider Victoria
Welcome to our Christmas Edition of the Flash newsletter
Uppermost in peoples' minds at the moment is the effect of the lowered (and still lowering?) interest rates so I have included a couple of articles that deal with issues you may already be encountering.
Good reading - Adrian Williams
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Dec 2008 Issue 03
Interest rates - where are they going?
The media have provided extensive commentary about rates since last week’s RBA drop of the official cash rate by 1%. Many of our clients have since contacted us regarding issues such as why some banks have passed on the full decrease while others have ‘kept a bit for themselves’ and what they should do in relation to getting out of their fixed rate loans to obtain the benefits of the lower variable rates.
The news is not always good unfortunately. Some banks are feeling the crunch a bit more than others and have hoped to gouge back a better bottom line by only passing on 0.8% or so of the 1% decrease. They are prepared to wear the brunt of criticism now but may be better positioned to grab the public’s attention in February, when we expect another rate drop by then being able to give more than the official RBA decrease at that time, whatever it may be.
Cynically, in the short term they are profiteering a bit. You could check to see if we can provide you with a better option by refinancing, but whether this is possible will depend on your specific circumstances. With the fixed rate issue, also well covered in the media recently, it is causing great anguish as people discover the penalty cost of getting out of their loans, known generally as the ‘break cost’.
This week we have had clients learn that they are facing penalties of $25,000, $35,000, even $50,000 to switch their loans to variable rates. The next article will speak more about this, but if you genuinely wish to change to a variable rate loan, it should be done as soon as possible or otherwise you will find the break costs increase as rates fall further. However this needs careful analysis to determine if it is financially wise / beneficial. We are happy to help in this regard.
Breaking a fixed rate loan can cost $
What are break costs?
Break costs are a fee charged by lenders when you make extra repayments on a fixed rate loan or pay it out completely. Most lenders will allow you to pay a small amount off your loan each year without being charged, however if you go over this amount or pay off the loan entirely then you will be charged this fee. Banks are not very good at disclosing their break fees!
Why do banks charge this fee?
When a bank funds a fixed rate loan they borrow money from the wholesale money markets. Their interest rate is locked in at the same time as yours. However they do not have the option to repay their loan early, so when you repay yours the lender may still be paying the higher rate on their borrowing and therefore the lender has an "economic cost" to carry until their loan is repaid. They pass this cost on to you as break fees.
How are break costs calculated?
They are calculated in a complex formula based on the difference between wholesale rates between the time when you applied for your loan and when your loan is repaid and multiplying it by the loan amount and the remaining term of the loan. But note, there is no exact formula as each lender has their own specific method of working out the fees they will charge you.
Because the term of the loan is used in the calculation, break costs tend to be very high for longer term fixed rate loans and larger home loans.
Unfortunately, in the current market, with interest rates falling significantly, break costs are quite high for people looking to get out of their fixed rate loans. A careful appraisal of your overall circumstances is essential. This is where the advice of a mortgage consultant can be invaluable and we are very happy at to assist you in this regard.
A Christmas message
We would like to wish all our clients, their families and friends all the best for the festive season. May it be one that brings you much happiness, some well-deserved rest and relaxation – and one or two nice presents under your Christmas tree.
In what has been arguably the most turbulent year ever in the mortgage industry, I hope that the team at Lightning Fast Home Loans has been able to provide a consistent service of great quality to all our clients and we promise to continue to provide the very best information, assistance and advice to clients throughout 2009.
Have an enjoyable, safe and memorable Christmas and a very Happy New Year -
Adrian Williams and the team at Lightning Fast Home Loans
Have you browsed our web site lately?
We have current articles on How the financial crisis impacts Australian homeowners, Fixed rate mortgages, Self-employed trying to get a loan, and a general article on how to Save Money On Your Home Loan, along with other valuable information.