Fewer New Zealanders were breaking fixed-rate mortgages but most lenders still applied break fees if homeowners wanted to get out of fixed-term loans, Mortgage Link owner and broker Jill Clearwater said yesterday.
The Australian Securities & Investments Commission (ASIC) this week revealed its new fee reform package that would stop Australian banks from "double dipping" with charges on customers. It said banks that charged customers establishment fees would not be able to levy exit fees.
The major Australian banks, which owned the major New Zealand banks, charged establishment fees of about $A600 ($NZ772) on a new mortgage, while exit fees ranged from $A700 at ANZ and the Commonwealth Bank of Australia to $A900 at Westpac and National Australia Bank.
Ms Clearwater said the main lenders in New Zealand had a discharge fee ranging from $100 to $200 per loan but breaking a fixed-term mortgage could be expensive.
Most lenders would charge market rates but a couple of lenders worked from wholesale rates and their formula was complicated.
In general, if someone on a fixed-term five-year mortgage at 9.5% wanted to break the mortgage with one year left to refix at 6.45%, the bank would deduct 6.45% from 9.5% to get 3.05%.
The person with the loan would then be required to pay 3.05% of the total loan as a break fee. In the case of a $100,000 mortgage, the break fee would be $3050.
Most of the activity around breaking loans came when interest rates were falling sharply, she said. People were fixing now on 6% to 7% and were unlikely to be facing that situation in the future.
"People need to be careful about fixing and picking the right term," Ms Clearwater said.
Craigs Investment Partners broker Chris Timms said the ASIC rules made it clear what banks could and could not charge for.
Under the guidelines, the law limited early termination fees to the recovery of a lender's loss caused by early termination.
Lenders could not use exit fees to discourage a borrower from switching their loan or to punish them for doing so.
ASIC's focus would be on the highest fees in the market, as they created the biggest barriers to switching, he said.
The early termination fees must be limited to the losses occurring at the time the early termination took place and, generally, the fee should decline in line with the length of time the consumer had had the loan.
One of the more interesting points was that if a lender recovered some losses from third parties, such as mortgage brokers, when an early termination fee occurred, the early termination fee should be reduced, Mr Timms said.
