Break that mortgage! Is it worth it to get a lower rate?


Interest rates have never been lower, so is it worth your while to break your fixed-term mortgage for a lower rate? The answer is… Maybe yes, maybe no, but it’s definitely worth running the numbers.

What are the advantages of breaking a fixed loan?

Potentially, the advantage could be the savings you’ll make on the interest. A 1% change in the interest rate is a significant amount of money, particularly if you have a large loan. Say your home loan is $800,0000 on a 30-year term:

  • At 5%, your monthly repayments will be $4295, or $51,540 a year.
  • At 4%, they’ll be $3819, or $45,828 a year.
  • At 3% they’ll be $3373, or $40,476 a year.

That means:

  • Move from a 5% rate to a 4%, you’ll save $5712 a year.
  • Move from 4% to 3% and you’ll save $5352 a year.
  • Move from a 5% rate down to a 3% rate, you’ll save $11,064 annually.

Awesome – what’s the catch?

The catch is that a fixed term is a contract and there’s a cost to get out of it. In fact, there may be several costs:

  1. A break fee. This can be high. Each bank will have its own way of calculating this, but by breaking the fixed term you’re causing the bank to lose out on the interest it was definitely going to receive from you. That means the longer your fixed term has to run and the higher the amount borrowed, the larger the break fee will be.
  2. Cash claw-back. If you were given a lump sum of cash when you signed up for your loan, that cash comes with strings. Say, a three-year claw-back period where the bank can take back some or all of the cash if you switch banks or break your loan.
  3. Legal fees to switch banks if you refinance, although these may be covered by your new bank.

How do I know how much my break fee would be?

You can use this calculator at Interest.co.nz to give you a rough estimate of your break fee. For an exact number, we can help you out pretty quickly by having a chat with your bank. You may also find they’re willing to negotiate in order to keep you as a client.

If you’re nearing the end of your fixed term, this could be a fantastic time to break your loan and take advantage of the lower interest rates. Give us a call or drop us an email and we can run the numbers for you in a matter of minutes.