Bank customers must remember they have no specific rights to break fee discounts if they decide to break fixed-term mortgages, Banking Ombudsman Deborah Battell says.
Battell says she has started receiving complaints from bank customers saying they're hearing banks are reducing or waiving break fees but their own bank won't do so.
Interest.co.nz reported yesterday that some banks were coughing up thousands of dollars to cover, or help cover, break fees for other banks' customers in order to win their mortgage business. In other cases customers are soliciting a lower mortgage rate offer from a second bank and getting their existing bank to match or better it, sometimes without having to pay break fees if they're ending an existing fixed-term mortgage.
However, Battell says customers must remember they have no automatic entitlement to break fee discounts.
“Customers have heard that banks have been reducing or waiving break fees and they are complaining that their bank won’t do this for them," says Battell.
“I am not aware of how widespread the discounting is, nor do I have direct evidence that it is happening. But I can say that banks are legally able to charge break fees and they are not obliged to offer discounts."
She says break fees are specifically allowed in credit contracts legislation and are designed to compensate banks for the costs they incur when customers break fixed-term contracts.
“Banks can also decide whether they want to discount or waive fees and may choose to do so in individual cases. If this is happening, it is likely to be a response to the current highly competitive environment for lending. It does not mean that banks will do this for everyone,” says Battell.
Moreover, the Banking Ombudsman can't make banks discount or waive break fees.
"This is a matter of each bank’s commercial judgement."
Battell has, however, published a Quick Guide on break fees, which highlights issues related to them that the Banking Ombudsman can probe.
8 Comments
Prior to the large fall in interest rates in 2009, was there any publicity from any of the banks of their use of wholesale rates in calculating break loan costs? Bank lending conditions don't describe the formula by which their costs are calculated and so it would be interesting to know if, prior to 2009 the retail rates formula was the formula generally understood to be in use in any break cost calculation, If so, then would some banks be entitled to apply a wholesale rates formula without disclosing that fact.?
Personally I can't see how it works any other way other than breaking against wholesale rates because that's the base rate they use for a fixed mortgage and how its hedged. What I don't agree with, in the case of retail fixed mortgages, is that they don't pay out break profits when the base rate in the mortgage is lower than the current wholesale rate - admitedly that hasn't been the case for the past 3-4 years since the GFC, but it will be again sometime and that needs to be resolved now.
Because it isn't either overseas as I understand it, doesn't make it right
http://data.consumeraffairs.govt.nz/businessinfo/cccfa/cccfa-regs-formu…
Formula 1 provides a procedure for where a contract has a single fixed interest rate for the entire term of the contract.
The formula is based on the positive difference between the present value of the remaining payments due on the credit contract and the present value of the payments that would be received if the amount fully prepaid is relent for the unexpired portion of the contract at the creditor’s prevailing fixed interest rate.
This formula applies where the contract has an interest rate fixed for the whole term of the contract.
A creditor may calculate a reasonable estimate of its loss with the following formula.
Loss:
= 0 - if interest rates have not reduced
= VFP - unpaid balance if interest rates have reduced
VFP = value of forgone payments
Mathematically, VFP is expressed as follows:
Where:
f = the number of payments to be made per year under the original contract
v =
i = the annual interest rate currently offered by the creditor on a credit contract of the same type as the original contract, but with a term equal or closest to the unexpired portion of the term of the original contract
n= the number of payments yet to be made
d= the number of days since the last payment due date
p= the amount of each payment payable during the fixed rate contract
If anyone is looking for an easy calculator for Early Repayment Calculator online.
http://www.homeloanexperts.com.au/fixed-rate-loans/break-costs-exit-fees/#BCC
Just settled my fixed term mortgage with the BNZ, I double checked the amount with this calculator and it gave prety much the same result as BNZ's.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.