Zoe Hunter: Do your homework first before breaking fixed mortgages

Fixed mortgages. To break or not to break? Photo / Getty Images

COMMENT:

The battle lines have well and truly been drawn in the mortgage wars.

Rock-bottom interest rates and the fallout of Covid-19 have people rushing to the phones to ask about breaking their fixed-term mortgage rates.

But depending on individual loan structures the penalty costs could far outweigh the benefits. So it's best to do your homework.

Fixed rates have plummeted to 2.55 per cent for one year at the Bank of China and 2.65 at the main banks.

Kiwibank has made the latest move in the mortgage wars after slashing its variable loan rates by 1 per cent.

As buyers wait to see who will make the next move, the game of slashing rates could be good news for buyers who can save big bucks on their loans.

Let's weigh up the pros and cons.

Pro: The financial gain can free up cash flow and take off some of the pressure many are feeling post Covid-19. Cheaper rates could mean savings in interest.

Con: There are break penalties that need to be paid upfront. These could be in the hundreds or thousands.

But there is no harm in asking the question to better understand the process and potential costs.

I bought my first home just three weeks before the country was put into lockdown.
I count myself lucky to have had a good bank manager who had some great advice for me.

I went in with my mind set on fixing everything for two years. Why not? The low interest rates were appealing and I wanted to lock in that deal.

But my bank manager talked me through all options, to fix, to float, for how long and how much. He also talked me through the penalties of breaking if I ever had to.

I came out with a completely different decision on how to manage my mortgage. I ended up fixing some for a year, some for two years and left a small portion floating for a year, which allows me to put in as much as I like to try to knock down the debt.

I followed the advice of my bank manager and I'm thankful I did, especially now post-Covid-19 lockdown - something none of us could have foreseen.

When it comes to breaking your fixed mortgage rates good advice is crucial.

It pays to also understand the trade-off between the break costs and the interest saved.

My advice? Do your research, shop around and get advice. Or it could cost you more in the long run.