Insight Story

If you are contemplating a fixed rate mortgage look carefully at the provisions in the contract, particularly with reference to the break provision. If interest rates fall you may have to pay a penalty based on the interest differential on the principal for the remaining term. A simple example is:

  •                         Assumed fixed rate at inception of contract 8% pa
  •                         Fixed rate at date of break 7.8%
  •                         Remaining term at break 2 years
  •                         Interest only loan $1m

Your approximate break penalty is:

  •                         0.2/100 times 2 times $1m = $4,000.

If the fixed rate were to increase you should be entitled to a refund.
You need to check your contract for this entitlement. Entering into a fixed rate loan agreement when the interest cycle is near the low point can offer attractive break profits , if your loan contract clearly provides for this benefit.

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