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Breaking A fixed-rate mortgage may be financially painful, but it is always worth finding out the facts from your lender and doing the maths, says an industry specialist.
Annette Kann of mortgage broker Roost says home owners need to get the break fee details from their bank to see what it will cost.
"Find out what it will cost to stay and weigh it against what it will cost to break it," she says. "Some people are breaking their loans, getting a better rate and keeping their payments the same to take years off their repayment time."
That's one option, but for those cash-strapped people - perhaps struggling after losing their job - anything that can reduce regular outgoings has to be good.
John Bolton, principal of Squirrel Mortgages, says there is no negotiating when it comes to break fees because they are not like an administration fee that can be waived.
"The break fee is a real cost to the lender and they have to recover it, otherwise they would lose tens of millions of dollars," he says.
Break fees can range from a few hundred dollars to $130,000, in one case brought to Bolton's attention.
The only way around it is if the mortgage is for an investment property, in which case the fee may be a taxable deduction. But property owners will have to move fast and complete any refinancing before March 31 to get it in this tax year.
"I had one client whose break fee was $130,000 on a million-dollar loan but, because the fee is tax-deductible, it was worth his while getting out of the contract," says Bolton.
"He was able to improve his cash flow as a result of paying lower mortgage repayments and was due to pay a lot of tax this year. He has now reduced his tax liability."
Bolton says some of his new clients were badly advised by lenders last year when they were encouraged to take out fixed-term loans at high rates. However, he says plenty of people are taking a cold, hard look at their options now the floating rate has dived to below 7 per cent.
"Sometimes you have to take it on the chin and accept you made a mistake and break a fixed-term mortgage - especially if you have years left to run," says Bolton.
"In a couple of years' time, when your fixed-rate loan ends, the rates will be higher again. Now is your chance to cut your losses and fix at a low rate.
"We have a lot of people who have two years to go on a fixed rate at, say, 8.5 per cent, and it doesn't make financial sense to break it because it will cost them more than they'll save in lower interest payments. Others have an opportunity to lock in to some fantastic rates, rates that won't be around in two years' time."
He says borrowers need to consider signing up for a five-year fixed rate before they start rising again.
"When rates go high, people fix for five years," he says. "When rates go low, they fix for one or two years because they are the cheapest. That's totally the wrong thing to do.
"These people are not thinking ahead because the fixed-rate options will roll over in two years' time when rates will have gone up.
"Then they stick with the lowest rate as the rates rise and end up on a one-year fixed rate of 9.5 per cent. They end up paying too much because they are not getting their mortgage structured correctly."
Kann says borrowers without the cash to pay the break fee may, at the lender's discretion, be able to add it to their loan. But again, a calculation will need to be done to see if it is worth it in the long term.
"Unfortunately there is no norm," says Kann. "Each borrower will need to do their own due diligence and decide whether to ride it out or break the loan agreement.
"I've had people pay $15,000 in break fees - but having done the maths they were better off. It looks like rates will drop again soon and that will increase the cost of the break fee."
And when it comes to advising clients, Kann says they should have their break fee double-checked and ask their bank how they calculated the fee.
"It can be a complex formula," she says. "So it is always worth double-checking it."
