Many home loans and residential loans have early termination fees, which are payable if a customer terminates a loan within a specified time. Lenders have this in place primarily to deter borrowers from changing loans frequently, but also to cover costs they incur as part of the process. If you have signed a contract and need to get out of it you will have to pay an early termination fee. This will impact you if you are looking to sell, to refinance, to renovate, or to purchase an investment property.
Variable and Fixed Interest Rates
Borrowers who prefer predictable payments generally prefer fixed rate loans, which won’t change in cost. However, the price of a variable rate loan will either increase or decrease over time and usually benefit people who are looking to add extra payments to their mortgage.
In 2011, The Australian Securities and Investments Commission (ASIC) banned the practice for new loans. This means any variable rate loans entered after 1 July 2011 won’t come with early repayment fees. If your loan is older than this, a fee may apply. When you agree to a fixed-rate period, you can change to a variable interest rate loan at any time. However, you will usually need to pay the lender a fee if your loan is still in the fixed-rate period. If you want to change to a variable interest rate and the lender says there is a break fee, you can ask them to waive or reduce the break fee at their discretion. Having a good repayment history and a long-term customer relationship will help the decision-making process.
The purpose of switching to a new home loan is to get a lower rate or find a home loan that is more suitable for your needs. When looking at refinancing, be sure to look at both the fees from the new loan and the costs of exiting the old one. If you’re on a fixed rate loan, your lender will provide a detailed calculation of the break costs. If the cost is not too high, it might still be worth switching if the new loan saves you money moving forward.
Take extra precaution when deciding between a variable option or fixed-rate option
Make sure to read the fine print and know what you’re signing up for
Consider your future plans; will you be moving cities or changing jobs? Will there be any foreseeable disruptions to your financial circumstances during the fixed-term rate?
Pointer Finance is your smart guide for everything to do with residential, self-employed, and SMSF loans. We’re experts in personal lending so you don’t have to be. We’ll keep an eye on the future while finding you competitive, flexible loan options with a speedy turnaround, so you’re not kept waiting.
Contact us today to find out more about early termination fees.