We launch a new calculator that can help you estimate the costs of breaking a fixed-rate mortgage contract early. It gives different results for each bank depending on their fees and calculation methods

Today we are releasing a new tool that will allow youi to estimate a break fee on a fixed mortgage contract.

It is a beta release.

There are many reasons to want to break a fixed rate mortgage contract.

But there are costs involved in breaking any contract. Firstly you need the other party’s consent. And if they give it, they would want any costs they are have covered.

New Zealand law requires banks to allow a mortgage fixed rate contract to be broken. But it also limits them to only recovering costs, and not ‘profiting’ from the transaction.

When interest rates are falling, borrowers often want to quit their high-rate contract in favour of a lower rate one.

But even when rates are stable or rising, there can be reasons to break a fixed rate deal. You may need to unexpectedly sell the underlying property (through a relationship break-up, or to move to new employment in another city or country, for example).

This calculator can give you an estimate of what the costs are likely to be.

While it has been tested internally, and reviewed by a number of banks in a bit of detail (it has been offered to all of them for feedback), it is not practical to apply every possible scenario. So your feedback is sought and we will adjust if from that as necessary.

The best ‘test’ is from someone who has recently broken a fixed mortgage contract. Comparing the results of our new tool with the calculation you actually got from your bank would be particularly useful.

The calculator is here.

How it works

The limitation that banks cannot profit from the transaction sets a clear boundary on what is involved. But bank costs are confidential to them. Most won’t supply their cost base generally, although they will offer specific dated details to individual customers.

The Government and the Banking Ombudsman have both addressed this issue and suggested how these transactions should work. We use variable formulas depending on the bank you have selected, based on how they have disclosed how they make these calculations. (But we may not have the exact formulas because not all of them are completely transparent on this detail.)

What is does

This calculator generates an estimate. Only the bank itself can give you exact numbers. Our estimate figures out the bank’s cost of money based on wholesale swap rates and the change between the start date commitment you made for the original term, and a recalculation based on the revised end date. We also add the bank’s fees for this type of transaction.

We need you to enter all the white fields for your loan. Your regular payment amount is one of them, but the calculator will suggest the minimum that is likely to be valid (for a normal table mortgage).

The regular payments from the start are assumed to be the only payments you have made. If you have made some extra payments, the results of this calculator may not be valid. Similarly, if you have arrears, the results below may not be valid.

What it doesn’t do

Some banks may use a different basis to the one we are assuming they use, and of course that will give a different answer. The variation should be quite small however. If it is not, please let us know and we will reassess how this calculator works for that bank. Do not use this calculator to work out a final result. Only your bank can do that. This calculator can only supply an estimate. It does not account for any extra payments you may have made along the way.

(We should also note that SBS Bank has two methods, depending on when the loan was taken out. It has moved to a wholesale method but there may be some customers out there for whom the earlier retail-rate based method still applies.)

It will not account for some special fees that may apply to your situation. Accrued Interest, arrears, and special settlement fees can also influence a settlement balance. These are bank dependent and not all will be included in our calculator estimate.

Also, it won’t necessarily be useful for investors whose loans are essentially for business purposes. The contract-breaking protections may be different in these cases.

While it has been tested internally, and reviewed by a number of banks in a bit of detail (it has been offered to all of them for feedback), it is not practical to apply every possible scenario. So your feedback is sought and we will adjust if from that as necessary.

The calculator is here.

Send feedback to david.chaston@interest.co.nz