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 you to estimate a break fee on a fixed mortgage contract.

It is a beta release (The system is still being tested. If you experience problems with it please let us know).

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

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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This may be useful to know if there is a global event or Auckland event which causes a significant drop in mortgage interest rates similar to 2008 where the OCR went from 8.x to 2.x quickly.
6 month to 2 year rates/periods in case of rate cuts may be as much of a risk management strategy as going longer in case of rate rises.
Also if Auckland house prices crash, borrowers may be able to move to interest-only, or mortgage-holiday, or discount rates to keep the market from plummeting too badly. Banks won’t want mass mortgage sales, or 1000s of stressed sales.

Lots of people are already on interest only! And the OCR is very low historically. So there is not a lot of safety margin out there at all. Its big time knife edge stuff out there in Auckland.

Be careful about jumping to conclusions about "lots" of NZ interest-only. The RBNZ C32 series shows it at 27.9% of all mortgages but that includes revolving credit lending which in most cases is not really 'interest only" because it comes with a sinking-lid limit.

Aye aye Captain. But even if its 10%, then its the most dodgy knife edge 10%.

Am pretty sure many (if not most) revolving products on the market don't have a sinking limit.... does RBNZ data split out?

I sense a collective sigh, as 65 billion in interest only mortgage holders, wipe the beads of sweat from their brow and stroke their forelocks ,concluding that when time approaches to refinance, banks will unfurl the red carpet, ignore any change in market conditions, and offer a year of free pizza to non believers.

Just plugged in my own details. The remaining balance figure in the calculations differed from my actual remaining balance (actual balance being about 10k lower than the projection).

Interesting looking calculator :) Played around with a few scenarios and it seems that the ending wholesale rate was the same whether there was 6 months or 12 months to go. Shouldn't there be a difference between 6 and 12 month swap rates?

There is often a difference but at the moment not really... basically saying that the market expects no change in the OCR for that period. 6mth BKBM mid: 1.97% 1 year swap mid: 2.03%