Earlier this month the reserve bank increased official interest rates which caused many investors and homeowners to re-consider their mortgages. This poses two great questions.

1. What will the cost of changing loans be?
2. When will the costs of changing loans be paid off?

To answer these questions let’s establish some averages:

• Average mortgage $250,000.
• Average variable interest rate 7.25%.
• Houses double every 7-10 years.
• Most people owe between 45-60% of their home.
• Most people refinance every 4 years.
• Interest rates increased by 0.25%.
• Fixed loans have break fees as they are ‘fixed’. They cannot be broken without being charged the interest you agreed to when you signed the mortgage.
• Deferred establishment fees are usually 1-2% for some credit providers which means they will charge you this amount if you cancel the mortgage and refinance with another bank or credit provider. Usually after 3 years there are no fees incurred, but do check your loan documents before attempting to refinance.

1. The weekly payment on the loan per week is $393.31 per month before the increase.
2. After the increase the amount went to $403.14 per week.
3. If the deferred establishment fees are 0.5% of the outstanding loan balance - $1250.
4. Lenders Mortgage Insurance will not be used as the equity built up will be a low risk to the banks.
5. Re-valuation and mortgage stamp duties could be $1000.
6. New bank fees for new bank - $500.
7. Settlement fees, $500, for your legal people’s time.

Total costs for walking away is $3250. That figure is 8 weeks worth of repayments at a principle and interest loan, even more on interest only!

So when we go to the new bank most likely they are going to give you everything you want for your new mortgage, but the rate is going to be in the vicinity of 7.23%. That takes repayments back to $392.53 per week.

So instead of paying the $403.14 we are back almost to where we started. The ’spread’ or difference in the saving is $10.61 per week.

The saving is $551.91 per year and the cost of changing loans is $3250 so it would take 306 weekly payments or 5.8 years to just be ahead of the costs of changing loans to beat the interest rate rise.

So, yes be concerned that rates are on the increase. Just be careful when running to the credit provider down the road or to your broker as they will ’sell’ you on the savings per week, just ask what the break costs will be and when you will start to be ahead of the costs.

Don Christie

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