Fixed Versus Variable Loans Fees

Horizon Mortgages Sydney Northern Beaches Fixed Verses Variable Home Loans Fees

Loan Penalty Fees

A common question I'm always asked by clients from all over the Northern Beaches, Inner West and North Shore area is what bank penalties will I be exposed to if I pay out my loan early. Well in a nutshell, it depends on what type of loan you take out. It's basically a case of Variable vs Fixed loans.

Variable Home/Investment Loans

Let's firstly look at variable loans. Prior to 2011 many banks charged customers a penalty fee if they paid out their variable loan generally within a four year period of settlement. So if you had taken out a loan in 2007 and paid it out in 2010 because you sold the property or refinanced it to another lender, then the bank would probably have charged you a potentially high fee to leave them. Fortunately, since 2011 government reforms have seen this practice change so now you can take out a variable loan and pay it off without being hit with a large penalty fee....even a month after settlement if you were lucky enough to win the lottery!! However, keep in mind that the lender will still charge a basic fee to have you leave them, regardless of the amount of time the loan has been open, and this is referred to as a Discharge Fee and these are normally in the $150-$350 range.

Fixed Home/Investment Loans

Now in regards to fixed loans whereby a customer wants to lock in an interest rate for one to five years, the rules are different. Since the bank has sourced out the money to fund your loan at a set price, they expect you to honor the fixed repayment agreement so they can meet their obligations as well. To pay off the loan entirely within the fixed loan term will incur what they call "Break Costs" and these fees can be potentially large and prohibitive for some people. There is no set Break Cost fee as every lender uses different mathematical formulas to calculate what the fee will be. Some of the information that will be taken into consideration to work out the fee includes the loan amount, how much time is left on the fixed rate period and how different is the fixed rate on offer now compared to when you took it out.

Also when it comes to making extra repayments on top of the minimum amount required on a fixed loan, lenders vary as to what they will permit on an annual basis. For example some lenders will allow you to pay off either an extra $5000 annually or 5% of the loan balance - whichever is the smaller amount. On the other hand there are some lenders that, no matter what the loan balance, will permit $10,000 to $20,000 extra to be paid off annually. So what happens if you pay off more than you’re entitled to. Yes that’s right….they’ll hit you with a penalty fee. So it always pays to check with the lender as to what you can and can’t do with a fixed loan.

So when deciding between a variable vs fixed loan make sure you consider your future goals. Do you have plans to move city or change your job? Sell the property in the next few years? Are there any foreseeable disruptions to your financial circumstance likely to take place during the space of your fixed-term rate? Are you about to come into money in the near future which you wish to throw on the loan? Maybe splitting the loan amount into a variable loan and fixed loan is more appropriate?

So to avoid being caught out by extra bank charges, it always pays to sit down with a mortgage broker (HORIZON MORTGAGES is a great place to start!) who can advise you properly on all your options and the pros and cons of every loan scenario.