With interest rates fluctuating, many homeowners who fixed their mortgage rates over the last 12-18-months are now wondering if they should break their current loan. If you’re on a fixed rate like 6.99% and see that the new one-year rate is 6.19%, it’s tempting to ask: Is it worth breaking my fixed home loan early?

In this article we look at whether breaking your home loan makes sense and how the process works – but keep in mind that each situation is different, and personalised advice is key.

The Good News: NZ Lending Rules Protect You

Under standard New Zealand lending rules, banks can only recover their actual loss if you decide to break your loan early. Essentially, if you choose to break a fixed loan and refix at a lower rate with the same remaining loan term, you’ll usually breakeven – but there is the potential to save more depending on your circumstances.

How Are Break Fees Calculated?

Breaking your home loan involves paying a “break fee,” but the actual costs can vary depending on your bank’s wholesale rates.

The basic formula is: Loan amount x fixed term remaining x interest rate differential on current rates for that loan term

Let’s break this down with an example:
Imagine you have a $500,000 loan fixed at 6.99% with six months remaining. The break fee would be calculated like this:

In this scenario, breaking the loan would cost around $500. However, break fees can vary depending on your bank’s borrowing costs, so it’s important to get specific calculations for your situation.

When Breaking Early Can Make Sense

If you’re looking to refix at a lower rate, there could be significant savings. Using the same example above, if you broke your loan with six months left, you’d pay a $500 break fee.

However, if you refixed at a one-year rate of 6.19%, your savings over that six-month period would be: $500,000 x 0.5 years x 0.8% = $2,000.

That’s $1,500 in profit after accounting for the break fee!

But every situation is unique, so doing a tailored cost/benefit analysis with a mortgage adviser will help you maximise potential savings.

The Added Perks: Retention Cash and Refinancing Offers

Beyond the savings on interest rates, there are even more benefits to breaking your loan early. Some banks are offering retention cash to keep existing clients, while others are providing refinancing incentives to new clients.

For example, many banks offer 0.9% of the loan amount as cash for refinancing. On a $1 million loan, this works out to $9,000 in cash.

Applying this to a $1 million loan scenario:

• If you break early and refinance with a new bank, you could save $4,000 in interest over six months and receive $9,000 in cash incentives. After deducting the $1,000 break fee, alongside $1,000 in legal fees, that’s a potential $11,000 gain.
• If you stay with your current bank, you could save the same $4,000 in interest and potentially receive $2,500 in retention cash, leading to a $5,500 benefit after deducting a $1,000 break fee.

However, each bank has its own incentives, and a mortgage adviser can help you weigh up whether it’s better to refinance or stay with your current lender.

The Importance of Getting Expert Advice

While the potential savings sound appealing, breaking a fixed loan and refinancing is a complex decision. The actual break fees, cash incentives, and long-term benefits can vary significantly between lenders and individual circumstances.

That’s where our team of mortgage advisers comes in. We’ll help you make sense of all the options and do the heavy lifting for you. Not only do we save you time by handling the calculations and negotiations, but we also make the process easier by providing personalised advice based on your unique situation.

Is Breaking Your Loan the Right Move for You?

If you’re considering breaking your home loan, it’s essential to look at both the immediate savings and the long-term benefits. Our team at Threefold can help you do a full cost/benefit analysis of your situation, looking at break fees, potential savings, and available retention or refinancing offers.

Even beyond breaking your loan, there could be additional opportunities for savings in your loan review that could benefit your financial situation even more.

Get a Free Consultation

Interested in finding out if breaking your home loan early could save you money? Click here to book a free consultation with our team, and we’ll help you navigate the process, calculate break fees, and explore all your options. With professional advice, you can save time, reduce stress, and make the best financial decisions for your home loan and future.

The content of this article should not be taken as financial advice, or a recommendation of any financial product. Threefold is not liable or responsible for any information, omissions, or errors present. We recommend seeking advice from a qualified financial adviser before taking any action.