Fixed Rates Break Costs Q & A
This is one example of the Banks Questions in regards to breaking a fixed loan
Paying out some or the entire loan earlier than the contracted term:
• You may have to pay an early termination fee or break cost and a fixed rate break administration fee if you pay out some or the entire loan earlier than the end of the agreed fixed period
How does the early termination fee work?
• The early termination fee covers the difference between the Bank’s funding rate (borrowing swap rate) for the agreed fixed term at the time your loan was disbursed and the rate that the bank is guaranteed to earn over the period remaining of the original fixed term (investing swap rate), at the time your loan is repaid in full.
How is it calculated?
• The fee is not calculated on the rate you pay under the contract. The early termination fee can change substantially on a daily basis due to constant changes in money market interest rates. If you pay out the loan early and the rate that the bank is guaranteed to earn is higher than the original funding rate, you may receive a benefit.
• The following approximate calculation can be made to determine the likely cost/benefit of terminating a fixed interest rate home loan, either in part or in full, earlier than the scheduled expiry date of the fixed rate period.
The following is a real example only and will vary day to day:
• The Bank lent a customer $470,000 at 7.8% for a term of three years from 10 February 2000 to 10 February 2003.
• To fund the loan the Bank borrowed these funds on the money market at 7.18%.
• The Bank would therefore have made a profit/margin of 0.62% over the period of the fixed
term.
• When the customer repaid the loan on 20 August 2001, the money market interest rate was 5.17%.
• The Bank therefore would have faced an interest loss of 2.01% on the balance of the loan over the remaining term (i.e., we still have to pay 7.18% but to re-lend to the money market we will only receive a margin over 5.17%).
• In this instance, the actual monetary loss amounted to $15,318.57, (to calculate roughly: $470,000 x 16 months x 2.01% = $15,110. The real calculation however uses days).
• However, we do receive a lump sum of $470,000 which we can reinvest so the penalty is adjusted to a present value (in this instance $14,674.20)
• A fixed rate break administration fee will also apply.
* The swap rates referred to in the examples (determined by “the Lender” based on prevailing market swap rates) are the rates used by “the Lender” to estimate the cost of providing the loan - not the rates at which loans are fixed.
EARLY TERMINATION FEE
The following approximate calculation can be made to determine the likely cost/benefit of terminating a fixed interest rate home loan, either in part or in full, earlier than the scheduled expiry date of the fixed rate period.
(A - B) x C x D = early termination fee cost / benefit to borrower
Example
A Borrowing swap rates (Original cost of funds) * 6.50% pa
B Investing swap rates (Rate at early termination date) *4.50% pa
C Remaining fixed period of loan 2 years
D Current loan principal $100,000
E Original fixed period of loan 5 years
(6.50%p.a. – 4.50% p.a.) x 2 x $100,000 = $4,000 early termination fee cost to borrower