Fixed-rate trap snares 43,000 home owners

More than 40,000 unlucky people have been caught out in a fixed mortgage rate trap, having taken out their loan at the highest fixed interest rates in a decade, denied any saving from the recent cuts and confronting costly break fees if they decide to refinance.

Figures from the Bureau of Statistics show 43,632 borrowers signed on to new fixed home loans between March and September, when lending rates were at a decade high. The official cash rate has since fallen by a full 3 percentage points.

According to the research group Infochoice, someone who took out a fixed loan of $500,000 in March would now be paying $800 more a month than if they had opted for a variable rate.

But borrowers looking to refinance face a difficult choice: continue to pay a higher interest rate, or incur thousands of dollars in penalty fees for breaking their fixed contract.

"It’s not just all about the rate," the head of Infochoice, Shaun Cornelius, said. "There are all sorts of conditions attached to the exit fees. They can be quite expensive."

While fees vary, borrowers who cancel their loan within the fixed period are typically forced to compensate their lender for the "economic cost" of breaking their contract. This is the difference between the interest the borrower would have paid the lender and the prevailing interest rate. As interest rates fall, this gap is becoming ever wider, meaning it may already be too late for fixed borrowers to save by refinancing.

On top of the economic cost fee, all four major banks also charge an upfront fee, ranging between $300 from ANZ and $900 from NAB, for breaking a fixed loan. Administrative and establishment fees are also charged by the new lender.

Read the full article from Jessica Irvine and Ehssan Veiszadeh of the Sydney Morning Herald  here:

http://www.domain.com.au/Public/Article.aspx?id=1228257193360&index=NationalIndex&headline=Fixed-rate%20trap%20snares%2043,000%20home%20owners

Mark Forytarz