Do Payments Go Down When You Remortgage? NZ Guide with Real Examples
Will remortgaging lower your repayments? Learn when payments fall or rise in NZ, the math, fees, and steps. Clear examples, checklists, and risks to avoid.
Break Fees Explained: What They Are and How to Keep Them From Eating Your Savings
If you’ve ever signed a mortgage or loan agreement, you’ve probably seen the term break fee somewhere in the fine print. In plain English, a break fee is a charge you pay if you end a contract early – think paying off a mortgage before the agreed term or pulling out of a fixed‑rate deal.
Why do lenders charge this? They lock you in at a certain interest rate and lose the expected income when you leave early. The fee is meant to cover that loss. Knowing how it works can save you a few hundred or even thousands of pounds.
When Do Break Fees Usually Apply?
Most break fees show up on long‑term agreements where the interest rate is fixed. Common scenarios include:
- Mortgage early repayment: Paying off a fixed‑rate mortgage before the end of the deal.
- Fixed‑rate loans: Settling a personal loan or car finance early.
- Credit card promotional offers: Cancelling a card with a sign‑up bonus before the required period.
Not every loan has a break fee. Variable‑rate products typically let you exit without a charge, but always check the contract.
How to Calculate a Break Fee
The formula varies by lender, but most use one of two methods:
- Interest differential: They compare the rate you were getting with the rate the lender could offer a new customer for the remaining term. Multiply that difference by the outstanding balance.
- Pre‑agreed percentage: Some agreements state a flat percentage of the remaining balance, often between 1% and 5%.
For a quick example, imagine a £200,000 mortgage at 3% fixed for five years. After two years, you want to leave. If the lender can now lend at 5%, the 2% difference on the remaining £160,000 equals £3,200. Add any admin fees and that’s your break fee.
Always ask the lender for a detailed breakdown before you decide. A surprise fee can turn a good deal into a bad one.
Tips to Avoid or Reduce Break Fees
1. Choose flexible products – Some lenders offer ‘early repayment’ packs that let you pay a smaller fee or none at all. It might cost a bit more each month, but it can be worth it if you think you’ll move soon.
2. Time your move – If you can wait until the end of the fixed term, you avoid the fee completely. Plan house sales or job moves around your mortgage dates whenever possible.
3. Negotiate – Lenders sometimes waive the fee if you’re refinancing with them again. Mentioning a competitor’s offer can give you leverage.
4. Check for caps – Some contracts limit the fee to a maximum amount. Knowing that ceiling helps you gauge the risk.
5. Use a mortgage broker – Brokers know which lenders have the lowest break fees and can steer you to the best product for your future plans.
Remember, the cheapest monthly payment isn’t always the cheapest overall. A low rate with a huge break fee can cost you more in the long run.
Bottom line: read the fine print, calculate the potential cost, and match the product to your life plans. That way, break fees stay a rare inconvenience rather than a costly surprise.
