Banks' Mortgage Prepayment Fees

[drelly]

This is a big issue, so I thought I'd start another thread to clarify which banks use wholesale as opposed to retail lending rates for the calculation of their break fees.

I'm no longer prepared to use any bank that uses wholesale rates. I need certainty when planning my investment strategy. If they're using wholesale rates, I'm at the mercy of their shifting profit margins and overseas borrowing exposure.

I will be shifting all my accounts away from Westpac over the next few months because of this. I'm considering ASB as I hear their online banking is very good. Recommendations would be helpful!

I have requested the early repayment calculations from the major banks so I can let you know what their policies are, but so far...

Banks that use retail rates
ASB
BNZ
National Bank

Banks that use wholesale rates
Westpac
Kiwibank (may be under review)

This is the reply I got to my letter complaining about the level of Westpac's break fees.

Your concerns have been forwarded to Customer Advocacy for investigation.

Your email has stated that “bank’s ability to charge break fees is governed by the Credit Contracts and Consumer Finance Act 2003”.

The Credit Contracts and Consumer Finance Act 2003 ("CCCFA") only applies, in the main, where the debtor is not a company. Accordingly, it does not apply to the loan granted to your company.

Notwithstanding this, pursuant to the Credit Contracts and Consumer Finance Act 2003 ("CCCFA") the Bank is entitled to require payment of a prepayment cost where such a charge is expressly authorised in a credit contract. The Act does not require the use of any particular formula or methodology. However, it stipulates that the cost must not exceed a reasonable estimate of the bank's loss arising from the full (or part) prepayment. The formula used by Westpac to determine the prepayment cost calculates a reasonable estimate of loss arising from the early prepayment of a fixed rate loan.

You have questioned the methodology used by Westpac in determining the cost to it of the prepayment of a fixed rate loan. As you are aware, the formula used by Westpac calculates a cost that is payable as determined by the current wholesale rates applicable at the time of prepayment (for the remaining fixed term) versus wholesale rates that applied at the time the fixed period started. These rates are appropriate because Westpac manages its fixed rate funding position by hedging/funding in wholesale interest rate markets for specified loan terms. Under these arrangements, when customers make early repayments, Westpac offsets its position in the same wholesale markets to close out its original hedge/funding positions, for the remainder of the fixed rate period. Therefore these rates are appropriate for calculating the prepayment cost. The way that prepayment costs are calculated varies between banks. Westpac’s loss is not determined by the prevailing retail fixed interest rates advertised at the time. The fact that other banks use different methodologies does not mean that Westpac’s methodology is incorrect.

Page 3 of the Choices home loan variation agreement you signed 8 March 2007 clearly records, under the paragraph headed “cost and charges on full or part prepayment”, that you may repay at any time all or part of your loan but you may need to pay an amount to Westpac (a prepayment cost) and other charges as specified. This paragraph explains that further details of the prepayment formula and how it works are available on request, or through Westpac's public internet site. A copy of this explanation was emailed to you on 23 January 2009. These documents are clear that Westpac uses a wholesale rate based methodology.

I have enclosed a copy of the breakdown of how the indicative quote given to you on 20 January 2009 was calculated.

Westpac considers that the prepayment costs which have been quoted are a reasonable calculation of the loss that would be incurred by Westpac should you opt to prepay your fixed rate loan. Accordingly Westpac is unable to consider any adjustment to the cost.

Should you wish to break your fixed rate loan, the bank will be happy to discuss options with you, including considering capitalising into your loan the prepayment cost so that it can be paid over the period of your loan.

[essence]

I can think of a word that rhymes with tankers!!!

Dave, one of my banks I use is ASB. IMHO, they are the best Bank to deal with in regards to accessibility of staff (ie personal banker) and on-line banking. I do use other Banks (the whole "don't use one Bank for everything" issue).

KiwiBank - I can't comment on them for PI.
Bank Direct - good systems (on-line banking) but can be a little difficult to deal with as they don't have any "front-line" staff, but in saying that, the staff I deal with over the phone are very good and know their stuff.

BD is a subsidiary of ASB. If you have loans with one, DON'T put any deposits with the other. If your finances turn to "custard", they are capable of claiming deposits to pay loans. (See one of Olly Newland's books re this concept.)

ANZ - antiquated systems and thick staff.

BNZ - I've had no dealings with them for years, so can't comment.

National/Sovereign/TSB - Never used them.

I hope that helps in some way.

Mind you, everyone is biased.

[Rolf]

ASB: I can recommend ASB, very good staff and their online banking is definitely superior. Lending policy is a bit conservative though.

National: I use National as well and have found them very good for property investment. However their systems are antiquated and their online banking facilities are ... well lets call it insufficient. They might upgrade it though as they have just completed a big overhaul of their website, just not the online banking yet - hopefully it's on the way.
I chose to break a handful of loans with them yesterday just before the latest rate cut - should have done it long ago but decided it was still worth it now. Their break fees seem to be reasonable (at least compared with others).

Westpac: I have found Westpac to be easy to deal with. Also their online banking seems quite ok, once you get used to it. No problem getting funding for properties in the past with them - but like you Dave I also currently have a big issue with their exorbitant break fees!

[jporteous]

Wholesale vs Retail Rates

Hi Drelly

I am trying to get my head around all this. Am I correct in assuming that the banks you have quoted have reasonably similar methods of sourcing money. If this is the case then the "actual" break cost incurred by the bank should be similar?

To me there are three possible scenarios:

• Kiwibank & Westpac have inflated their fees....
• Kiwibank & Westpac have higher cost / less flexible sources of funds
• Other banks have similar costs but are using this situation to out-compete Westpac & Kiwibank.

Either way its not a good look for Kiwibank & Westpac. And as I am with Kiwibank I will be looking at the pros/cons of shifting to other banks....

jono

[BusyLizzy]

ASB, Sovereign, NZ Home Loans: All very good (as stated above). They actually use the same on-line systems which are excellent to use. (Same system, different skin I think). When I log into NZ Home Loans, I can see my Sovereign mortgages as well, and transfer between the accounts. Personal account manager has been helpful and sorted out misc fees that crop up every so often (like when I was given an unwanted overdraft facility). Customer support staff always good to deal with, efficient, helpful.

They gave me fair break rates, and have never charged me early repayment fees when I have made lump sum payments (even when current rates were lower than my fixed rate).

National Bank: I had an account with them last year, and didn't like their online systems at all. Phooey!

[Jabroni01]

I totally agree with the comments on ASB in this thread, they have been great for our banking needs with the service and also it seems one of the better bets regarding the huge break fee issues people are experiencing with other banks. Big thumbs up ASB Jab's

[nzfrazer]

Have loans with ASB, Sovereign (owned by ASB) and Kiwibank...all of them are good.

I used National in the past which were OK though they don't seem to have very competitive rates.

Banked personally with ASB for 15+ years with no complaints.

[Dunning]

Can only comment about BNZ in regards to mortgages. Always made time to see me, even when I walk in off the street at 4.20pm asking if someone can see me. Happy with the break fees(just wish I'd done it earlier). Early repayments were fee free as long as current equivalent rate was higher than my fixed rate.
Internet is a pain to log onto but I can see everything (company and personal) at a glance.
Currently have a run around about how much we can borrow. 3 different people have told me a nearly 300K difference. One of a few still happy to lend out to 90% LVR.

[brendan]

ASB, Sovereign, NZ Home Loans: All very good (as stated above). They actually use the same on-line systems which are excellent to use. (Same system, different skin I think). When I log into NZ Home Loans, I can see my Sovereign mortgages as well, and transfer between the accounts.

So when you are using sovereign online, you can see your NZ Home Loan accounts. Can you also see your ASB accounts, or do you need a separate login? I'm asking as I personally bank with ASB and have loans with sovereign, as was told I need two user names.

[nzfrazer]

ASB and Sovereign internet banking are completely seperate.

[drelly]

Have loans with ASB, Sovereign (owned by ASB) and Kiwibank...all of them are good.

Small correction... Sovereign isn't owned by ASB. Sovereign provides services to ASB and vice versa but they are both owned by the Commonwealth Bank of Australia.

[nzfrazer]

Damn aussies! Oh well, at least we have Kiwibank

[CJ]

To me there are three possible scenarios:

• Kiwibank & Westpac have inflated their fees....
• Kiwibank & Westpac have higher cost / less flexible sources of funds
• Other banks have similar costs but are using this situation to out-compete Westpac & Kiwibank.

You forgot the fourth.

That eveyone else has mispriced the break in a riseing market and it will come home to roost if everyone breaks.

happy with ASB. Good internet. Can see all my entities in the same screen. Good personal banker.

[ecoeco]

My experiences of the major retail banks:

ASB (bankdirect):
Last loan with BD ran out in 2007. Loans with BD from around 2001 - 2007. Great service. Easily able to do all banking over the phone or internet - very handy when overseas.
Internet banking easily does everything I need.

BNZ:
Loans from 2001 - present.
Great product, seven years fixed term - fantastic.
Good service, need to go into a branch occasionally - getting better doing thing over the phone over time. Staff in branch happy to help whenever I pop in with no appointment.
Internet banking has taken a while to catch up with ASB but now does everything I need.

ANZ/National:
Loans from 2000 - 2003
Terrible. Uniformed staff, terrible service in branch. Very disappointing.

Westpac:
No loans recently.
Good staff, well informed and helpful in terms of inquiry. Haven't used internet banking.

KiwiBank:
Loans 2007 - present
Good staff, internet banking fine. Good interest rates, shame about the break fees.
Not having a standard branch to go to is annoying. Found it hard to arrange a loan top up.

[Anita]

Hello! Westpac has been hammering us and infact due to their misguidance and bad instructions, we have been quoted $87,000 break fee, and we just ignored it and continued biting our lips.

Lately, prepayment costs for couple other loans quoted and we accepted, and rates locked and been told if taken within 60 days, they honour the rates and prepayment costs obvioulsy be lower as we were nearing to the term. We signed the Rate Lock agreement and also kept the e-mail of the bank manager in our file and moved on with life, and bought another rental too, as we knew, our rates and planned ahead.

And, on the 58th day, when we asked bank to formalize the 'Rate Lock agreement' the bank manager wrote to us, his 'prepayment calculations' were wrong and we have to pay $8700, instead what they originally quoted for $1100 as they took wrong rate expiry date.

We were torn apart, as since they quoted, and we accepted the 'rate lock', we believed them and we moved onto another rental investment too, as we budget our finance to pay only $1100 or obviously lower - which Bank Manager has quoted us in black and white in our e-mail, 58 days ago, and we trusted.

He has honoured the rates for another loan for which 'rates locked' at the same time, with break fee quoted, but not for this particular one, as they saying it was a calculation error AFTER 58 DAYS, AFTER WE HAVE OTHER FINANCIAL DECISIONS MADE.

We have already paid over $30,000 to Westpac for 'break fee' in last few months, and also have over half a mil locked @ 8.7% expiring in another 3 years!!! purley due to the Relationship Manager's misguidance and misinterpretation. We had to eat the bullet and continue. And, now, this?


We wrote to the bank manager's manager - the Regional Manager - he keeps quiet and nothing has been done, and we can't afford this cost, all out of blues, Westpac giving us such a distress.


I scribbled this in a hurry, will re-read it and edit it soon. Would like to hear thoughts/suggestions