In a time of rising interest rates and rising mortgage repayment requirements, it makes obvious sense for borrowers on fixed terms to increase their repayments whenever they can, before they are required to when their fixed rate contract rolls over to a new higher rate.
Not only will that get you ready for an unwelcome surprise, but getting ahead of the game gets you some additional headroom should something unexpected occur - like losing a job.
But that does pose the question about when extra payments - either extra regular repayments, or a one-off lump sum repayment - trigger break fees. After all, a fixed rate contract is, well, fixed.
Banks have allowed for a limited set of early repayments in their fixed rate contracts. But there are subtle differences between institutions. Some are more generous than others, some less so on this point.
Getting ahead of the game is important to many borrowers. In fact, RBNZ data (C35) shows that in the past year borrowers made $16.2 bln in extra payments to build that resilience, a surprising level of preparation. This is a lot of extra repayment, given that the scheduled repayments ran at $19.4 bln in the same year. It made sense when interest rates were very low. But as they rise, it seems likely that the level of 'excess repayments' will fall.
However the level of excess repayments should have been more than we actually did. In June 2015 when average two-year fixed rates were 4.75%, borrowers were making excess repayments at the rate of 7.3% of their overall mortgage liability. In June 2021, when those rates were 2.53% on average, borrowers had in fact reduced their excess to 5.4% of the total liability.
Surprisingly we collectively didn't use the low interest rate period to build this resilience, rather we seem to have reduced it on a proportional basis.
But that is not to dismiss the embedded large excess that has built up. It is impressive.
We have surveyed the banks on how they treat borrower requests for making extra payments. The following table is our summary of their responses. The actual position for each bank must be checked with them before you make any decision to change because there is likely to be more crucial detail involved. But generally most banks encourage you to do this even in their fixed rate contracts. Some have more generous terms than others, but all welcome building repayment resilience into your mortgage loan.
| Extra or Early home loan repayments | ||
| Floating | Fixed | |
| ANZ | repay any amount any time, no fees |
Regular extra repayments to $250/week, An extra lump sum repayment that’s no more than 5% of current loan amount owed, without fees, otherwise break fees may apply |
| ASB | repay any amount any time, no fees |
any early repayment incurs break fee costs (ERA) |
| increase repayments by up to $500 per fortnight, or $1,000 per month without incurring an ERA |
||
| BNZ | repay any amount any time, no fees |
you can pay up to 5% of a Standard loan amount at the start of your fixed term each year without early repayment charges, otherwise break fees may apply. For Classic loans, break fees may apply. |
| Kiwibank | repay any amount any time no fees |
repay up to 5% of loan balance, each year, without fees, otherwise break fee applies |
| change payment amount no fee if within 5% limit |
||
| Westpac | repay any amount any time no fees |
increase repayment up to 20% above minimum repayments without fees, decrease repayment down to the minimum amount at any time, lump sum repayment incurs break fee plus $20 admin fee |
| Cooperative Bank | repay any amount any time, no fees |
Lump sum up to 5% at start of each year, min $1000, or raise regular repayment amount, then, no fee |
| SBS Bank | repay any amount any time, no fees |
$45 fee for any changed repayment plus a break fee may be charged. |
| TSB | repay any amount any time, no fees |
repay up to $10,000 per year, without fees |
| change payment amount up to $1000/mth, up to 3 times/yr, without fees, otherwise break fees may apply. |
||
Things can get a little less flexible when you want to make a one-off, lump sum repayment into a fixed rate loan. These can bump up to a level that triggers a break fee. One obvious way to avoid that is to just save the amount you want to pay until the fixed contract rolls over, and repay it then for no break fee cost. Borrowers using offset plans can save the extra within those to avoid interest costs. The table above suggests there are a wide variety of approaches to how banks will handle a lump sum repayment to a fixed rate mortgage contract.
The links to the actual terms and conditions for each bank is hot-linked to the institution name.
34 Comments
I increased ours in the app after a few beers one night, forgot that it was fortnightly not monthly so ended up increasing it way too much. Maybe I could have asked the bank to reduce it, but instead just was a bit more frugal than normal until the fixed term expired.
I refixed a portion of ours recently - thankfully a small one - and we bumped it up to a nice round number that we can budget around and also helps us get ahead. Next time around we'll be choosing a bank that gives us more flexibility around repayments as everything will be coming off fixed at the same time.
I have a set of home loans from 2.5% - 3.2% with ANZ. I've been making lump sum repayments once a month to the tune of 1-5k (basically paying down as much as I can), and they've been very happy to take it with no break fees. I have already paid down the 5% lump sum as well. No changes to repayments required - simply term reduces.
The point of this analogy is that in a rising market, the banks will publish one thing, but will be more than happy to turn a blind eye since it's in their favour to take back money lent at low interest rates which they can lend out again at higher interest rates.
The key point is you can do extra lump payment or payment increase within the limits described above without penalty, but if going above those limits then a penalty fee MAY apply. Want to pay off 10% of your loan in one go and your rate is months from renewing? Just ask the question. If you're fixed lower than current rates, there is unlikely to be a fee. The 5% is more to provide some flexibility especially while rates were dropping.
It would be unwise to pay extra into your mortgage if you were concerned about unemployment. Better to keep a stash of cash in case you need it. Keep it in term deposits. Imagine using up all your cash to pay off a paltry sum on your loan and then not have enough to keep you safe between jobs.
You've saved $10 on paying your mortgage each month but now you don't have the reserves to keep up with the rest of the payments.
So first build up a reserve to tide you over for six months or more before paying down the mortgage.
I guess you could rely on a revolving credit type of account. You should have one of those.
You don't keep that spare cash in the bank because if you lose your job WINZ will ping you for it if you try and get a benefit to see you through to the next job the second you give them your bank statements. Keep enough for a rainy day the rest goes on your mortgage.
Interesting. I’m with ASB too. Do you mind sharing details of your loan structure and whether fixed or variable to compare?
Lump sum is something we’d be interested in as it doesn’t commit us to having to maintain the higher rate for the whole term but would still bring down our interest bill.
There is an error for the ANZ Floating repayment fee, $100.
According to the ANZ website: https://www.anz.co.nz/rates-fees-agreements/home-loans/, there is no fee incurred:
"Allows you to make extra repayments or a lump sum payment whenever you like (e.g. if you get a bonus) – or repay the whole loan – with no fee charged."
Great article.
I had my mind blown - and not in a good way - by the following OneRoof article the other week:
https://www.oneroof.co.nz/news/can-rising-inflation-magic-away-your-mor…
They manage to conflate price inflation (which doesn't erode debt in in real terms) with monetary inflation (which does) so completely, that you almost get whiplash reading it. They flip-flop between the two phenomena multiple times in the same paragraph even, talking about them as if they were the same thing.
They stop just shy of claiming that a 7% CPI reduces your mortgage by the same amount in real terms (although it's heavily implied). Their angle seems to be that if the CPI is at 7% then your income should be rising by the same amount, which means that you have more money to pay down your mortgage with quicker. Unfortunately:
- most people's incomes aren't keeping up with inflation
- even if they were, the cost of everything else is rising by the same amount, so it doesn't equate to more money in their pockets
- even if it did, paying down your mortgage doesn't decrease it in real terms, it decreases it in nominal terms, which has nothing to do with inflation; and
- they completely ignore the fact that most banks have early repayment fees for fixed rate mortgages, which will reduce the benefits of paying it down early
As commentators here have pointed out, banks may or may not actually charge these fees, but they can, and will presumably do so if they deem it to be in their best interests.
It's no wonder people keep making such terrible financial decisions if they're getting their advice from "experts" like the ones at OneRoof. People read this stuff, fail to understand it (because it's nonsense), and think "well this person seems to know what they're talking about, I guess now must be a pretty good time to have a mortgage after all". This type of "journalism" is ignorant at best, at worst intentionally misleading.
Even if your payrise is less than inflation (which it shouldn't be or you're getting a pay cut), it's still going up faster than your mortgage.
If inflation stays ahead of wage rises long term, very few will be able to afford even food.
A few years pay rises, and the mortgage is much smaller relative to your income.
Even 2% annual pay rises is 22% in 10 years. Relative to income, the mortgage is 22% smaller, even if you've paid none off.
In 20 years that's nearly 50%.
Even 2% annual pay rises is 22% in 10 years.
Only if it's 2% above inflation.
Relative to income, the mortgage is 22% smaller, even if you've paid none off.
Only if you're paying 0% interest.
In any case, it's a moot point. A reduction in DTI is not the same thing as a reduction in your mortgage, nor what the article (or I) was talking about.
Depends on your ratio of income and living expenses. If 40% of your pay goes to the mortgage, only 60% of your income is exposed to "inflation".
Pay goes up 2%, but that includes the 40% that goes towards the mortgage. If cost of living goes up 2% as well, your ratio does not need to change, therefore in 10 years your repayments will be 20% higher.
Not sure that's the whole story for BNZ. My "letter of advice" contains this kicker,
"Please note the 5% "no charge" threshold referred to in clause 9.8 of the agreement will not apply to this facility. This means that you may have to pay an early repayment charge on any early repayments you make during a fixed rate period."
I get the impression they add that endorsement to their "Classic" fixed terms.
Seems an appropriate article to ask this question - does anybody know of a calculator or spreadsheet tool that would help me determine how much extra I need to pay off when my mortgage comes up for renewal next year (or one portion of it) to keep my weekly/monthly payments the same as they are now.
In other words, how much extra do I need to pay in a lump sum to offset higher interest rates?
It's a fairly simple calculation to do, at least roughly speaking. Current payments are the old rate plus the principal divided by the term. New repayments are the new rate plus same. You want them to match. Call the lump sum c. So r1*p + p/t = r2*(p-c) + (p-c)/t. Solve for c, put in your rates, principal and term.
"Break Fees" I have a real problem with these. Years ago i was talking to a bank manager about these when i was intending to pay off a mortgage. I asked what a break fee was. He explained it was a part compensation for the lost interest from the loan. I followed by asking him if the bank just sat on the funds that I had loaned and paid back, until the end of the term of my loan. He said no (of course), so i pointed out to him that not only was the bank not losing on interest income, because they re-loaned the funds to another borrower, but they also had the opportunity to add all the other fees that the charge when someone takes out a loan. He started to look a little embarrassed. The next day he told me the bank would waive the fees. Probably helped that I told him I'd be taking my business elsewhere?
The one good thing about Westpac is their repayment policy. You can log in to your internet banking at any time and increase your repayments by any figure you like up to a maximum 20% increase in repayment amount. And reduce it back dowm anytime you want. All self-service via internet banking, no complicated forms to sign and return.
Hey this stock pick is distracted boyfriend and his girlfriend right? There is a big love story most people are unaware of behind this couple: https://www.youtube.com/watch?v=AUQOUChTUwg
How, how, how are the banks allowed to PUNISH people for trying to pay off their loans faster. The cards are stacked against borrowers just trying to put a roof over their heads already and then if by some miracle they are able to go above and beyond to give the banks their money back and get a little less screwed by the system, the system is set up to screw them anyway.
Honestly who in government is allowing this to happen. People might say well its a business and you signed the contract and yes I understand that but what other options do you have. Ultimately the bank is going to make their record profits regardless, so if 0.01% of people are able to take the banks foot off their neck and get a little of reprise from the weight of massive debt, simply by paying the bank their goddam money, the banks should be happy about that.
Does this same punishment apply to personal loans? If so that is even more sickening. People should be able to pay off a loan as quickly as they can no matter what the loan is for...
It's almost as though the whole system is designed to bleed every last cent out of the working class and funnel it into the pockets of the fatcats at the top. I for one am sick of it.
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