Fixed-rate borrowers explore switching to lower interest rates
Mortgage broker Glen McLeod (pictured above left), of Edge Mortgages, reported a surge in inquiries from borrowers asking about breaking their fixed home loans to take advantage of newly lowered interest rates.
With the Reserve Bank cutting the official cash rate by 50 basis points and banks offering rates as low as 5.59%, many fixed-rate borrowers are reconsidering their current mortgage terms. However, breaking a fixed mortgage usually comes with a hefty fee.
“You've got to look at what the cost is,” McLeod told RNZ, explaining that break fees depend on the original rate, time left on the loan, and the bank’s current lending rates. In some cases, the cost of breaking a loan may offset any potential savings.
The true cost of breaking
While the prospect of switching to lower rates is tempting, McLeod urges caution.
He described a recent case where a client would have paid $4,500 to save just $5,000, barely breaking even after factoring in the costs.
“Banks never lose, they pass on the cost they would have lost to you,” McLeod told RNZ.
For many borrowers, adding the break fee to their mortgage might result in minimal or no savings once additional interest is considered.
Not always worth It
David Cunningham (pictured above centre), CEO of mortgage broker firm Squirrel, noted that few inquiries had come in because most borrowers don’t have much time left on their fixed terms. He explained that break fees, often calculated using wholesale rates, could cost more than the savings gained by switching to a lower rate.
Massey University banking expert Claire Matthews (pictured above right) echoed this caution, reminding borrowers that fixed-rate agreements were made with full knowledge of their terms.
“They may have had an advantage when interest rates went up and they were on a lower rate… this is the reverse of that,” Matthews told RNZ.
Long-term considerations
Borrowers must consider their long-term financial situations before deciding to break a mortgage, especially if rates continue to fall.
“What is the true cost?” McLeod asked, emphasising the importance of fully understanding the numbers before committing to a break fee.
Matthews added that those who break their terms now may regret it if rates fall even further in the coming months.
“Are you going to do it again?” she asked, suggesting that fixed rates offer stability, which can sometimes outweigh the potential savings of chasing lower rates, RNZ reported.
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