The number of people reporting concerns about the fees charged for breaking a fixed term mortgage with their bank is on the rise as mortgage rates fall.
Figures supplied by the Banking Ombudsman show there were a total of 27 complaints, inquiries and disputes in the first seven months of this year relating to early repayment charges - one more than the 26 reported in the whole of 2018.
Banks charge a break fee when a mortgage holder ends their term early to switch to a lower interest rate.
Fixed home loan rates have been falling in the wake of cuts to New Zealand's official cash rate and declining wholesale borrowing costs for the banks.
Reserve Bank data shows that the average two year fixed term mortgage rate advertised has fallen from 5.1 per cent in August 2017 to 4.7 per cent last month.
Last week the major banks also cut their two year fixed term mortgage rates again with Kiwibank offering a record low two year fixed term rate of 3.65 per cent beating its nearest rival ASB which is offering 3.69 per cent.
Banking Ombudsman Nicola Sladden said it typically saw complaints go up following a drop in mortgage rates by banks.
"Customers understandably want to lock in cheaper rates, but they need to understand that there are costs involved in breaking the contract early – both through break fees and cash contributions that need to be repaid."
The last time the Banking Ombudsman reported a spike in complaints was in 2015 after rates began falling.
It received 100 inquiries, complaints and disputes in that year alone.
The Banking Ombudsman only deals with a fraction of the complaints and disputes that banks get as consumers have to go through a complaints process with their bank first before the ombudsman can handle the case.
The ombudsman received seven cases in June - a highest number in a single month for a while - and found there were consistent themes coming though which related to customers being given a quote for break fees but then finding the break fees were different by the time the transaction went through, customers not appreciating that cash contributions would need to also be repaid and customers disputing the way charges have been calculated.
Sladden said its advice to consumers thinking about making changes to their lending was to get an estimate of the charges first and to carefully check the timeframe for the estimate as sometimes estimates were only based on a very short timeframe.
"Calculating early repayment charges involves a complex formula. Many – but not all – banks base the charge on the difference between the wholesale interest rate on the loan and the wholesale rate applicable when the loan is repaid early (other factors are also included in the calculation)."
Details about the charge and how it is calculated is set out in the loan documentation for the mortgage.
There is nothing stopping borrowers from trying to negotiate a lower charge, but banks are under no obligation to agree, a guide on the ombudsman website notes.
"Any reduction is entirely at banks' discretion. Borrowers should assume banks will apply the charge in full."
Sladden said when a customer asks their bank for estimates of break fees, they should also ask how long the quote is valid for, as they are generally time limited.
"Customers should also check their contracts and ask their banks about any obligations for other costs, such as repaying cash contributions."
Sladden said it was difficult to say whether they were likely to see an increase in break-fee related complaints for the rest of 2019.
"If bank rates drop further, we are likely to see the same issues coming up again."