Key Points:

A banking expert says banks should not be obligated to soften the impact on mortgage holders breaking costly fixed-term loans, despite calls for leniency by politicians.

And the banks themselves say it will usually require "exceptional circumstances" for the costs of breaking a loan to be cut.

The issue is being hotly debated as interest rates continue to tumble, widening the gap between those locked into high fixed-interest mortgage rates, and those able to access new low rates.

David Tripe, director of Massey University's centre for banking studies, said it was not up to banks to make allowances for people erring in their mortgage arrangements.

"If the politicians want to interfere in the matter, perhaps they could stump up the costs for the banks of restructuring all their financing arrangements," Dr Tripe told the Weekend Herald.

"There is a much stronger case there should be some action in relation to reducing rates."

If mortgage holders had been given bad advice before committing to high fixed interest rates "the person who gave them that advice should be looking very carefully at their liability insurance because they have got a problem", Dr Tripe said.

Finance Minister Bill English said he expected banks would be pressed to reduce the penalties for breaking mortgage agreements to get cheaper interest, and he would be raising this with state-owned Kiwibank.

Labour leader Phil Goff has called on the banks to waive break penalties for borrowers in genuine hardship, where perhaps one partner is made redundant.

The Credit Contracts and Consumer Finance Act allows a borrower to apply to a bank to change the terms of a loan on the grounds of "unforeseen hardship".

Kiwibank spokesman Bruce Thompson said the bank's policy was to pass on break costs, as to discount or waive the costs would be direct losses for the bank.

"However in exceptional circumstances, such as bereavement, the bank has made compassionate contributions to the costs associated with discharging a loan before completion of the fixed term."

Westpac spokesman Craig Dowling said the bank might also, in exceptional circumstances, contribute to the costs of breaking from a fixed term.

"This would be unlikely to happen if the sole reason is to move to a lower rate. We do have processes in place to assist customers facing hardship, and look to implement solutions in that regard on a case by case basis."

"Where a customer is in financial hardship," said a spokeswoman for ANZ and National banks, "and breaking out of the fixed term loan will improve their cashflow situation, capitalisation is an option we can discuss with the customer."

But the Productive Economy Council, an economic think-tank, has come out strongly in support of both Bill English's and Phil Goff's requests for banks to reduce fixed interest rate bank fees in the interest of the New Zealand economy.

It has to happen," says Selwyn Pellett, the spokesperson for the PEC, "because the OCR reductions are not flowing through to the economy at large quickly enough, and by the time it does 15 per cent of New Zealand could be unemployed."