With the next OCR review expected to drop, and we’ll know more by 27 Nov, many homeowners are asking: Should I break my mortgage and refix?
When you fix your mortgage, you lock in an interest rate for a set term, while the bank secures funding in the wholesale market. The difference between what the bank pays for funding and your rate, is how they make their profit.
If interest rates drop during your fixed term, you might consider breaking your mortgage early, for these lower rates. However, breaking a fixed mortgage comes with a break cost, which compensates the bank for their potential loss due to this change.
How break cost works:
The bank calculates the break cost based on:
- Your current mortgage balance
- How far into your fixed term you are
- The difference between your current rate and the new market rate
- The remaining time on your mortgage
- The earlier you are in your fixed term, the higher the break cost. A bigger difference between your rate and the market rate also means a higher fee, and larger loans result in larger break costs.
Before breaking your mortgage, compare the break cost with the savings from a lower interest rate.
What you will need to consider:
- How much will a break cost you?
- How much will you save by locking in a new rate?
- How long do you plan to stay in your home?
- Can you afford the break cost?
Because break costs can vary, it’s best to consult a financial adviser or your bank to determine if breaking your mortgage will be beneficial to you.
Final Thoughts
Breaking a mortgage can save you money if the interest savings outweigh the break cost. We can help you run the numbers, review your financials holistically and give you a personalised plan that’s tailored to your situation and needs.
Written by Shona McDowall.
