Is it worth breaking your mortgage?
Your guide to analysing whether it is worthwhile to pay a break-fee and refix your mortgage at a lower cost.
Tuesday, June 2nd 2009, 7:10AM
by Maria Scott
Longer term fixed mortgage rates are continuing to increase and this may be persuading some floating rate borrowers that it is time to switch to a fixed rate before costs rise even further.
"For example, if the one year interest rate is 5.5% and the 2 year rate is 6.25% we can use this to imply a breakeven one year rate in one year's time of 7%.
"If we choose to fix for one year at 5.5% and in one year's time we then re-fix at a rate less than 7% we will have made a better decision than fixing for 2 years at 6.25%, and vice versa."
The rough rule of thumb is that two years at a rate of 6.25% will cost 12.5% in total. To work out a comparison between two years fixed at 6.25% and taking a one year rate at 5.5%, deduct 5.5% from the total over 2 years (12.5%), which equals 7%.
"Of course a lot of people don't view it that way," says ANZ.
"They make the error in thinking that because the rate you might face in a year's time could be above 6.25%, you'll be worse off, when the break-even is in fact 7%."
ANZ goes on to present a range of break-even calculations for the current set of fixed rates ranging from 6 months to 2 years. All breakeven rates are higher than current rates in the analysis.
‘If you choose to fix for two years at 6.25% instead of one year at 5.5% you are basically saying that you expect the one year rate to rise to 7 % in one year's time. In our view this is possible, but not the central scenario - hence we favour short term fixes at this stage.
"We favour fixing for shorter terms (like 6 months) and rolling repeatedly."
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