Fixed mortgage rates: Should you break them?

A flurry of people are inquiring about breaking fixed mortgage rates post Covid-19 but Bay mortgage advisers warn penalty costs may outweigh the benefits - and it could cost more than $6000.

Historically low interest rates have sparked a mortgage war with fixed rates dropping as low as 2.55 per cent for one year at the Bank of China and 2.65 at the main banks.

Meanwhile, state-owned Kiwibank also slashed its variable loan rates by 1 per cent this week.

Graeme Leigh of The Mortgage Centre Rotorua Limited said his team had fielded a number of calls from clients wishing to break their fixed-rate terms post Covid-19.

"Especially given new advertised special interest rates," he said.

"However, the banks' break penalty costs (also called early repayment adjustments) have generally outweighed any cost/saving benefit in doing so.

"We have seen some break penalties as high as $6198, which meant there was no real benefit or cost advantage to the client to break."

Hope Kerr-Bell, of Majesty Mortgage and Insurance Advisors in Tauranga, said they had "most definitely" had an increase in inquiries for breaking fixed-rate home-loans due to the lower interest rates on offer.

"In many cases, the cost of breaking the fixed rate can outweigh the savings, but every situation is different so it is worth looking into this to determine if you can make interest savings."

Kerr-Bell said people should seek advice from a mortgage adviser who will calculate whether it is worthwhile.

Loan Market mortgage adviser for Mount Maunganui, Alastair Watson, said lots of clients had inquired about breaking fixed-term mortgages.

But he said banks calculated break costs that can change on a daily basis and it was worth reviewing whether it was worth breaking fixed rates.

"The downside is there's an upfront cost which needs to be paid, but there is a clear upside in interest savings via cheaper rates.

"This financial gain frees up cashflow which can take the pressure off in times of uncertainty."

Watson said break costs varied significantly across banks so there was no cost or downside to asking the question.

Mike Pero Mortgages chief executive Mark Collins said his team were always being asked about breaking fixed rates.

"That is where good advice is critical, you need to understand the trade-off between the break cost and the interest saved otherwise you may find it costs you more in the long run."

Collins said his team had had a lot of inquiries about break fees post Covid-19, especially after seeing rates drop in March.

"A lot of people, whilst were still employed or had income, were scenario planning and seeking to understand if they would be better off to break the loan term, refix at a lower rate and reduce mortgage payments.

"In some cases, this could be a good move, however, it really depends on the individual loan structures and the cost of the break fee."

Collins gave the example of the fee being higher than the interest saved from breaking the fixed rate.

"It's highly specific to the individual lending situation; so my advice is to talk to a mortgage expert about what the options are."

A Kiwibank spokeswoman said inquiries to break an existing fixed-term were up by about 40 per cent after the announcement of the bank's 2.65 per cent interest rate.

However, the spokeswoman said when considering whether to break a fixed term, individuals should weigh up the cost of the break fee versus the decrease in repayments.

"A break cost takes into account your lending amount, the length of time remaining on your fixed term and the difference between wholesale interest rates on the day you fixed and the day you wish to break.

"As break costs will be different for everyone you are best to inquire with your lender."

The spokeswoman said presently a third of Kiwibank home lending customers either have a fixed rate expiring in the next six weeks or a loan account on variable so are able to take up the offer without having to break an existing fixed term.

A Westpac NZ spokesperson said there was an increase in customers breaking their mortgage during March and early April.

"Break costs reflect the cost to Westpac of securing wholesale funds at the time a fixed-term loan is agreed and will vary depending on each individual loan.

"If customers are considering breaking their mortgage, they should talk to their bank to better understand the process and the potential costs and benefits involved."