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.
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