Should we break?

[blackman]

Hi - we are considering breaking our fixed term on our rental property which is currently fixed at 7.65% until Dec 2011. The bank has quoted us $5500 to break the mortgage and will offer us 6.5% fixed for 2 years and 3 years fixed @ 6.9%. Reasons we are considering breaking is to help cashflow but to also spread the risk of interest rates being considerably higher come Dec next year (although who really knows). Any thoughts/advice appreciated

[drelly]

Would you save anything if you break and refix?

[halfempty]

Will they allow you to add the break fee to the lending?

[mortgage broker]

Blackman, I think you will find that once you stat breaking rates you are effectively crystalising your loses. You see over a 20 year term you will find that the losses and gains level out. But once you start breaking you are adding another layer of cost to the funding.

[roseneath_rat]

Blackman, how much is the loan & thus what is the potential interest saving? $5,500 in isolation is not enough info to get a grip on it. Do you have concerns about cashflow?

[Property Man]

Also, if you were to add the break free to your lending, the long term cost of paying this back (over a 20-30 year term) would be enormous once interest is added, compared to if you paid your break fee outright.

Regards
Aaron

[speights boy]

As others have said, the size of the mortgage will really affect the advise....but I'll take a stab and a different tack.

Assuming 250k and the two rates of 7.65 & 6.50.
Difference per week is $55 per week.
Minus the 5,500 @ 6.50 = $7
Therefore net cashflow increase is $48 per week.
But your mortgage is now 255.5k

Interest rates in Dec 2011??? who knows.

BUT...if reducing your cash flow by $48pw is really that important; important enough to increase your debt by 5,500 then you should perhaps have a look at your overall situation.

Do you have the appropriate safety margins in place to weather a few squalls in the economy?

I may be way off base here...just another perspective.

cheers
SB

[blackman]

Mortgage $350k. the bank will allow us to add the fee to the mortgage. thanks for all the advice so far - keep it coming!

[drelly]

blackman - They are charging you roughly the same break fee as you would save in interest if you refixed for 2 years, so there is no saving there. The only advantage would be longer term savings if interest rates rise before Dec 2011. If you're only refixing for 2 years at this point, is the extra 8 months worth the gamble? Rates would have to rise quickly and significantly to make it worth your while.

[roseneath_rat]

If its cost neutral to break then your primarily considerations should be three-fold:
1. Would you rather have the spare cashflow at the moment?
2. What is your view on future interest rate changes?
3. Is there anything else you would like to do with that loan if it is broken?