Bill to quit mortgage appealed

[essence]

Tuesday, 28 October 2008

A Christchurch family is appealing against a $15,000 bank charge for ending a five-year fixed-rate mortgage after eight months.

David and Catherine Johnson and their four children moved into a Cashmere house in February on a $270,000 mortgage fixed at 8.99 per cent interest for five years. They have sold the house to move to Australia, but ending the mortgage early means they face a $15,000 charge.

Rest of the article here.

I've just checked the Westpac fixed rates for 5 years = 8.6% (28/10/08 on GoodReturns website). That's a .39% difference. I believe that the calculation is worked out on the number of days outstanding multiplied by the %age difference. There will also be Admin Fees etc included as well. I am happy to be proven wrong with my calculation and if anybody can define it further, please do so.

I can see both sides of this argument. The family want to move on and feel that $15K is too high. Mind you, taking out a 5 year fixed rate mortgage and changing your plans (ie in this case going to Oz) you'd expect the Bank not to be very happy with them.

The Banks have an obligation to shareholders and other customers to recoup money that they would've made had the mortgage run it's full fixed term.

[cube]

Rent the house out and keep the mortgage!

[Wayne]

They took a contract out. They would be unhappy if, in a couple of years time when say the interest rate was considerable higher than their fixed rate, the bank decided they wanted to increase the rate. I have no sympathy really.

[spurner]

It sounds expensive. Maybe they're comparing their existing rate with a shorter, much lower current rate.

Based on those numbers, if they used the same formula I have had used in the past, I thought it would be around $5500 to break.

[essence]

Hi Spurner

I agree with you. It's not that they don't expect to pay a penalty but its the amount of the penalty that is the problem. It does sound high doesn't it??

My calculations work out that they would be paying about $4,700 and even with Admin Fees, Release of security fees, etc, it would probably still be closer to your $5K amount than $15K.

[spurner]

Yes it does sound rather high. Might be some anomaly with the current big difference between short and long term rates.

A long time ago I paid fees to break some loans I had fixed at 5 years for 8.95%. The fee was similar, around $15K, but the loan amount was a lot higher.

Hi Spurner

I agree with you. It's not that they don't expect to pay a penalty but its the amount of the penalty that is the problem. It does sound high doesn't it??

My calculations work out that they would be paying about $4,700 and even with Admin Fees, Release of security fees, etc, it would probably still be closer to your $5K amount than $15K.

[outspoken]

Their repayment formula can be found here (thanks SmallBrain)


The formula is very complex but even their simple version would put their repayment fee at around $11,000 without admin fees etc.*

*assumes a 1% hedge rate differential

[essence]

Thanks for posting that Outspoken, I'm always willing to learn.

From the Westpac website

Prepayment Cost = Loan amount prepaid * (Interest Rate Differential) * Remaining Term

Westpac states that this is an approximate calculation and would depend on the payments already made and the hedge differential.

Using the figure of $270K (as quoted in the original newspaper article), 1% hedge differential and a remaining term of 4.5 years the formula would look like this.

=sum((270000*1%)*4.5)

= $12,150 plus also add Admin fees, Release of Security Fees etc


and yes I am aware these are rough figures.

I used the full amount of $270K given that only a short period of time had elapsed from draw-down of monies to wanting to pay the debt off.

[CJ]

The OCR has also dropped 1.5% since they signed up, so teh $15k isn't look so unreasonable??

[Wayne]

a big sum but a fair calculation (well fair for the bank). Looks like they don't have a leg to stand on. If the courts were to alter this it would set a bad precedent for contracts me thinks.

[spurner]

Now I see. They charge their fee based on the differential in wholesale rates. A little unfair for the consumer as wholesale rates have dropped markedly yet fixed rates have barely moved, but still completely reasonable way of assessing it.

[Wayne]

Now I see. They charge their fee based on the differential in wholesale rates. A little unfair for the consumer as wholesale rates have dropped markedly yet fixed rates have barely moved, but still completely reasonable way of assessing it.

they are looking at margins - what they lose not what you might gain