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ans Serif">I have had a lot of clients dismayed that they have fixed rates for their home loans that are considerably higher than the current interest rates. Some have talked to their bank and been told the break fee is a silly amount.

ans Serif">This response has put them off going any further with their enquiry. But they should have, as it is very simple to decide what you can and should do when you have all the information.

ans Serif" color="#008000">For example:

• ans Serif" color="#666666">You have a loan of $150,000 fixed for 3 years at 8.25 %. The current 3-year fixed rate is 6.95 %. The bank has advised the

  Early Repayment Fee is $2,250.
  You now need to find what the interest savings will be over this 3-year period i.e. 8.25 % less 6.95 % = 1.3 % pa. Now calculate what the interest savings will be i.e.$150,000 (I have ignored the cost of the ERF for this example) x 1.3% = $1,950 pa.

• ans Serif" color="#666666">You will be worse off for the first year by $300. But over the 3 years you would be better of by $3,600.
• ans Serif" color="#666666">You can look at it another way by looking at the pay back period, this can be calculated by dividing $1,950 by 12 = $162.50 per month. The cost to break is $2,250 so divide this by $165.50 = 13.6 months. After 14 months you will be ahead.
• ans Serif" color="#666666">Would you write out a cheque for $2,250 for one in return of $5,850 three years later? I consider that to be a very good investment.

ans Serif">I also believe now to be an optimum time to consider doing this as it is widely expected that the Reserve Bank will lower the OCR (Overnight Cash Rate) by .5% (if it has not already done this) with another possible reduction of .25 % early in the New Year. This should mean the 90-day bill rate would fall by a similar amount. The banks price their housing floating rate from the 90-day bill rate and hope to add a 2 % margin. Thus currently the OCR is 5.25 % therefore the banks floating rate will be around 7.25 %. The market has priced in the expectation of the lowering and driven the 90-day bill rate down to 4.90% this means the banks floating rate should be about 6.90% and some of them are starting to match this rate now.

ans Serif">The fixed rates have a little more margin to drop but I would expect that from mid next year the banks will be increasing their fixed rates.