KEY POINTS:
When property prices were booming a couple of years back, buyers simply signed on the dotted line and didn't think too much about the fine print. Many are rueing that day - especially those who signed up in the last 12 months for five-year fixed rates .
Quite literally thousands of property owners have been inundating their lenders, mortgage brokers, the Commerce Commission and the Banking Ombudsman's office with complaints.
Banks are businesses, however, and their fixed rates are set in a way that they make a profit over the period of the fix. Borrowers choose fixed rates because they think it will save them money.
"You signed the contract," says mortgage broker Annette Kann, of Roost Mortgages. "Now you see the rate come down and you bleat a different story. Where it makes my blood boil, however, is the variance between banks and how they calculate [the break fee]."
Property buyers that took headline-grabbing rates with Kiwibank and Westpac, in particular, but now want to break the fixed rates, will be regretting their decisions. Break penalties from those lenders can be up to three times that of Sovereign, ASB and National Bank, says Kris Pedersen, mortgage broker at Property Financial Solutions.
The Credit Contracts and Consumer Finance Act (CCCFA) requires banks to charge only the economic cost to them. But some charge the break fees on the wholesale mortgage interest rates even though they sell the mortgage to consumers at retail rates.
What's more, says Kann, some are very conservative in how they do the calculation, which costs the property owner more. Kann hasn't met one banker who will negotiate on the rates - even when it came to her own mortgage, which was with Westpac.
The ombudsman's case load has doubled in a year with fixed rate break fees being the single biggest growth factor, although the majority of the complaints are from people who feel hard done by rather than suffering true hardship.
The key complaints, says ombudsman Liz Brown, are:
Borrowers complaining about the policy of charging break fees.
The level of those fees.
Poor advice by banks to take out long-term fixed-rate loans.
The complexity of the calculation process.
The fact that break fees rise rapidly as interest rates fall.
There isn't much the ombudsman can do about the first two complaints - other than point people to the Commerce Commission. The last point is one that Brown predicted last year - having experienced mortgage rates falling in the late 1990s.
She wrote to all the main lenders recommending that they make the day the enquiry is first made the cut off date for break fees. That way property owners know what they will pay.
It would appear from the numbers of complaints choking the ombudsman's helpline that her letter did not have an impact.
Some homeowners and property investors have seen others paying far less than they are and want a lower rate. Others are in real trouble. Either way, few understood the consequences of fixing their mortgages, says Kann.
Property investors can have additional problems when it comes to break fees. Pedersen cites the case of one investor client who had an 85 per cent loan to value ratio (LVR) across two properties when he bought them in 2007. Thanks to falling equity values, that's now 89.5 per cent.
The investor wanted to sell one property to reduce debt. But he needed to capitalise the break fee and the bank refused to let him sell, because his LVR would still be above the 80 per cent that it now required.
There are many reasons to break fixed-rate mortgages, including getting cheaper rates, selling properties to increase cashflow and locking in the best rates while they're around.
There are also tricks of the trade that bank staff may not tell you, but a good mortgage broker will.
One of Pedersen's clients faced $2500 in break fees when he sold a property. Instead he put the mortgage on term deposit for the remainder of its life and just paid the difference between the two interest rates - saving himself around $700.
For those who can afford the break fees it may prove profitable to pay the exorbitant cost. Mortgage rates are still on their way down, most commentators say.
The low point may be later this year, between June and September, says Lawrence Diack, New Zealand Mortgage Finance broker.
"If you are rolling off sometime this year and don't need cashflow I would suggest sitting tight as rates will still come down further. Once you are off your fixed rate lock in a long term for three to five years."
For those with longer fixed rates the calculation of what's best to do becomes more difficult.
"You can peg back some of the costs in terms of cashflow savings as well as over the longer term you will eventually find yourself on the right side of the ledger in years three, four and five," says Diack.
"When and how much will rates rise over that time, though, is the million-dollar question and you need to talk to your broker as thousands of dollars is involved."
There are lessons to be learned from rapidly falling interest rate environments such as we experienced in the late 1990s and currently.
"It's not the interest rate you pay, it's the amount you pay," says Sue Tierney, mortgage broker at Mortgages By Design and president of the Auckland Property Investors Association.
That's because many property buyers forget to factor in various fees charged by banks and few think they'll ever need to break their mortgages and don't even consider break penalties.
Here are 10 lessons:
Don't be sucked in by cheap interest rates. Consider if it's the right deal for you.
Stagger several portions of your mortgage so that you don't have to refinance the entire loan all at once with an unfavourable interest rate.
Always ask your lender how they base their CCCFA calculations. Is it on wholesale or retail interest rates? You never know when you may need to break.
Consider breaking even if the penalties cancel out the saving - providing you can get a better rate now than you would in two or five years' time when your fixed-rate period ends.
Consider capitalising your break fees on to another mortgage if the sale of a property won't cover the loan. This could help improve your cashflow.
If rates look set to fall over a sustained period, break early rather than later as the penalties get higher the lower the cash rate falls. Quotes for break fees usually only last a day.
If you are due to roll off a fixed rate and are worried about rates rising, lock in the fix in advance with your bank.
Don't trust bank staff. Some are young and ill-trained. Get everything they say in writing.
Read and at least try to understand your mortgage contract.
Get advice from a mortgage broker.
