If you choose to break your fixed rate to take advantage of lower rates, if your circumstances change and you repay your loan early or if you change your payment terms in any other way during your fixed term, we estimate whether or not this will result in a loss for us. If it will, this estimated loss is the amount that you’ll be charged as a fixed rate break cost.
A fixed rate break cost is a cost you may be charged when you break your fixed rate home loan.
Fixed rate loans give you certainty about your interest rate by passing on the risk of changing rates to Kiwibank. Kiwibank manages that risk in the wholesale interest rate market. A break cost is charged when we estimate that changes in wholesale rates mean your break has resulted in a loss to Kiwibank.
No matter how you look at it, a break cost calculation is complex, but basically it takes into account three key factors and applies them to your individual situation:
- Wholesale interest rates – we base our estimated loss from your fixed rate break on changes in wholesale interest rates. This is because we manage the risk of changing interest rates in the wholesale interest rate market.
- Amortisation – the calculation takes into account how much of your loan you would’ve paid off over the remainder of your fixed rate term.
- Time value of money – a dollar payable today is worth more than a dollar payable in the future – so the value of the remaining payments is calculated as at the break date, while the payments themselves would have occurred over the remainder of your fixed term.
You can find details of the break costs and how they’re calculated in the Kiwibank Home Loan Terms and Conditions (PDF 208.2 KB).
This fixed rate break cost calculation is an estimate of the loss we make when you break your fixed rate home loan. If we didn’t recover that loss from the customers who break their home loans, we’d have to look at other ways to recover it.
We want to offer the best rates in the market. If we charged less than our estimated loss, it might mean our break costs would be lower, but we couldn’t be as competitive with our rates. So essentially everyone with a Kiwibank Home Loan would be paying a subsidy for the customers who break their fixed rates.
Using wholesale rates in our calculation ensures we’re passing on our estimated loss to customers who break. Using retail rates would mean that not all of our estimated loss would be recovered.
That will depend on the size of the break cost, compared to the amount of money you’ll save by switching to a lower interest rate. If the only way you can pay the break cost is by adding it onto your home loan (you’d need to be reassessed to do this), you’ll also need to take into account the extra interest you’ll pay by having a larger home loan.
You might manage to save money by breaking your fixed rate and switching to a variable rate, then re-fixing when rates have fallen further. But if fixed rates don’t drop enough, you could also end up worse off.
Once you’ve entered into a fixed rate home loan, the only way to be certain of avoiding a break cost is to not break your fixed rate.
This means you need to consider your plans and circumstances carefully when taking out your loan. Make sure you take the term and type of loan that’s most appropriate for your situation now, and fits with your plans for the future (bearing in mind that your plans could change without much notice).
If flexibility is important to you, you could choose a variable rate instead of a fixed rate when you take out the loan. Or you could take a combination of variable rate and fixed rate, to get a mix of flexibility and certainty.
Another option is to spread your loan over different fixed terms (for example, one, two and three years). This means that a part of your loan will always be coming off a fixed rate soon, and will help smooth out the impact of increasing interest rates.
If you sell your home and buy another one, we may be able to transfer your existing home loan and rate to the new property. Before you sign anything, talk to us and we’ll go through your options.
Break costs are complex; they’re different for each person and change day to day. If you’re considering breaking your home loan early, it’s really important you give us a call first. We can tell you if you’re likely to be charged, how much it might be and discuss all your options. Call us on 0800 000 654.