Mortgage Question

The two examples given on the stuff link related to breaking a fixed term rate and re-fixing with the same bank.  If you are changing to kiwibank:

Refinancing package

Our great value refinancing package could save you up to $1,200. Here’s how in a nutshell:

You'll pay no legal fees because Kiwibank’s legal transfer service is free. Using your own lawyer could cost around $600 There's no registered valuation required, unless you're using an apartment, townhouse or leasehold property as your security. This will save you around $350 You'll pay no application fee, saving around $250 There are no fees on your everyday banking. Service fees may apply.

Our refinancing package is completely free for residential property loans that tick the following boxes:

The loan is over $50,000 It's less than 80% of the current capital value of the residential property provided as security It can be transferred to Kiwibank without changing who owns the security It's secured by two or less securities The refinancing documentation is not signed under a power of attorney The refinancing doesn't form part of a series of same day transactions.

If you're using an apartment, townhouse or leasehold property as your security, you'll need to obtain and pay for a registered valuation. If not, Kiwibank's refinancing package won't cost you a cent. The refinancing package is not available for business banking customers. Your existing lender may charge break costs or discharge fees and these are not covered as part of the refinancing package. If you want to use your own solicitor, you can still use the refinancing package, but your solicitor's fees and costs are not covered as part of the refinancing package. You will need your own solicitor if the loan cannot be transferred to Kiwibank without changing who owns the security, where the refinancing documentation is signed under a power of attorney or where the refinancing forms part of a series of same day transactions.

I haven't read all the replies Stacey, but I used to work for a Bank and dealt with these questions.

I am not sure what all the banks do, but our one used the following penalty:

Basically work out the amount of interest you would pay on your loan at your current rate for the remainder of your term. For example, if you had a mortgage of $150k with 1 year remaining it would be:

$150,000 x 9.00% x 1 (year) = $13500

Then the bank works out what they would earn if they had to lend your money to someone else at today's interest rates - they would have to use whatever rate is applicable to how much longer you are fixed for - in the example, 1 year. Let's say the one year rate is 8%pa:

$150,000 x 8.00 x 1 = $12000

The difference, $1500, is what the bank would lose by having to lend your $150000 to someone else at a lower rate. So that would be your penalty.

My calculation is a little off, because in reality, the interest you would pay over your remaining year would be decreasing as you made repayments, but this should help you get a rough figure.

Another example:

1) $200,000 at 9.5%pa for 18 months =
$200,000 x 9.5%pa x 1.5 = $27000
If bank had to lend your $200,000 to someone else at 7.99%pa then:
$200000 x 7.99%pa x 1.5 = $23970

Difference of $3030

What you then have to work out is whether you will save that and more if you were to switch. Some banks (not the one I work for) also have extra "admin" charges for early repayment.

I would call your bank and tell them you are thinking of switching and what would your penalty be. They should be able to give you this information over the phone.

To be honest, in most cases you won't make much of a saving as the penalties are "real" costs. But if it means you are switching banks then there could be extra benefits. Banks are really competitive at the moment so should contribute to your switching costs (as a valuation may be required), should offer you competitive accounts and may reduce their interest rate as well - never go by the face value. If you can negotiate a good deal you may be able to save money in the long run.

Good luck - and PM me if you want any more information.