In times of low interest rates taking a fixed rate home loan may seem like a great idea but life is an ever-changing situation and circumstance may see you needing to repay that fixed rate loan early.
This can get tricky when you suddenly realize the complexity of the fine print on your loan contract. In particular I am referring to “break costs” otherwise known as early repayment fees (ERF), early payment interest adjustment fees (EPIA) or unwind adjustment.
They all refer to paying more than is allowed on a fixed rate loan or paying it out in full before the end of its term. Now let’s be honest, I don’t quite understand the specifics of all this as I am not a psychic but let’s highlight the basics.
Banks fund fixed rate loans to end consumers by using funds from the wholesale money market. When they do this they are taking a lending rate for their own loan that is locked in for the same term as your fixed rate loan. However they are not allowed to repay their loan early.
So when you and I as consumers decided for whatever reason to repay our fixed rate loan early we are upsetting their careful calculations. The hardest part is still to come; there is no magic formula for calculating what this cost will be to you! It is accomplished with information you are not privy to. So you have to rely on the information provided by your lender and blindly take their word for the cost they advise you are liable to pay. Their calculation is usually a version of:
Early Repayment Fee = Amount of original loan x Remainder of the fixed Term x Cost of funds
The cost of funds in basically the interest rate your bank is charged from the wholesale market lender. So how can you be sure you are only paying what the lender is rightfully entitled to? My answer is you cannot be sure, but a quick calculation of what you would have paid in interest had you continued your loan to its full term would give you a ball park figure.
This all leads to my own personal experience in recent times. I paid out a fixed rate loan early and just was sceptical of the amount of break out costs charged, it didn’t seem plausible when carefully considered along side all the information I had exchanged with my lender during the winding up process.
Upon further enquiry and information collection I was even more certain my lender was overcharging me. Over many days and numerous phone calls, speaking to an array of department representatives I could not be appeased by their “its just the way it is” company line.
So I stated my intention to take the matter to the Financial Ombudsman but they would not be swayed. I did take the matter to the Financial Ombudsman.
A few months later after some back and forth with forms and phone calls and information sharing I received a call from my lender saying that in line with the findings of the Financial Ombudsman I was owed a refund of the costs I had paid, to the tune of $3000.
Now it might not be enough money to rule the Monopoly board but IT WAS THE PRINCIPLE OF THE MATTER! I stand on principles and tenaciously defend them when my gut tells me I am right.
Honest mistakes can be made by anyone including a large financial organization; but let’s make sure they are honest mistakes and protect our own interests along the way.
(This was a post I wrote at the beginning of 2010, I believe there have been some changes to the way financial institutions need to convey their break costs to consumers since this.)