Mortgage break fees: Businesswoman shocked at $15k charge to change banks

Bank break fees can cost more than people might imagine when interest rates drop. Photo / Kenny Rodger

Breaking your mortgage or overhauling your debts can be expensive, as one business owner found out recently.

The Waikato woman said she was surprised when ASB told her she’d have to pay $15,000 to change banks.

But ASB said break fees, or early repayment adjustments (ERAs) were used only to recoup the cost of the change.

And with interest rates falling, more people might be in for a similar surprise.

“We’re just wanting to restructure some of our lending to make it more tax-efficient,” the businesswoman told the Herald.

“Most of it’s residential lending. We’ve got a few properties and a small business loan.”

The total value of debt was about $2.5 million, she said.

“That’s why I thought they should really be trying to help. Basically the response was: There’s nothing we can do, you’ve been a good customer, here’s the latest break fees.”

In late July, she was told it would cost slightly more than $10,000 to break, she said.

But just two weeks later she said that had ballooned to $15,000.

“Their excuse was the rates have dropped, but they haven’t dropped that much.”

Before the Reserve Bank cut the Official Cash Rate to 5.25% last week, several banks reduced their rates.

But the $15,000 seemed unreasonable, the businesswoman said.

She said she approached another major bank.

“I went to them and they’ve given us a good deal.”

The businesswoman told ASB: “We’ll stay with you if you can waive the fee.”

She said the bank declined that overture and now it would not be viable for her to change banks for another 15 months.

ASB said several factors went into calculating break fees.

“This is because when a customer chooses to fix their loan’s interest rate, the bank funds this with its own borrowing from other sources, such as depositors, wholesale money markets, other banks and through the issuing of bonds, for the same fixed rate period.”

An ASB spokeswoman added: “If a customer decides to switch their interest rate or repay their loan early, either partially or in full, the bank is still required to honour its commitment to the money it has borrowed for the remainder of its fixed interest rate period and may incur a loss.”

As a result, banks charged an early repayment adjustment to help recover that loss.

ASB said the fees were calculated on factors including the current loan balance, the amount a customer wanted to repay, changes in wholesale interest rates and time left on the current fixed interest rate period.

“Wholesale rate changes are reflected in our ERA calculations on a daily basis.”

The office of the Banking Ombudsman said if customers repaid a loan early, banks might not be able to lend that money to someone else at the same rate if interest rates were lower than when the loan was taken out.

“People are often surprised about the break fees and it’s really important banks disclose them,” Banking Ombudsman Nicola Sladden told the Herald.

She said the Commerce Commission examined break fees a few years ago.

“The details about the early repayment charge, including how it is calculated, must be set in the loan contract’s terms and conditions.”

John Weekes, online business editor, has covered rounds including consumer affairs, crime, court and politics for the Herald, Herald on Sunday, Stuff and News Corp Australia.