To Break up or Not to Break up with Westpac - (Fixed Rate Home Loan)

Ld4w17dch17d on 20/05/2021 - 22:44
Last edited 21/05/2021 - 14:06 by 1 other user

Hello all - Long time lurker first time poster here…

Long story short - I currently have a 3 year home loan fixed with Westpac until Dec 2021. Rates at that time was at 3.69% (Which was about 0.2% lower than the equivalent variable rates back then, hence got suckered into fixing… and not long after, even pre COVID, variable rates start getting much lower than my fixed rate.)

The Dilemma - to break up with Westpac now or to let it run its course and reconsider in 6 months time?

Current (3 Yr fixed) rate for a comparable home loan now is at 2.18%

Break fee quoted today (May 2021) is $5k with 6 months to go on the fixed term. (Break fee quoted back in Nov 2020 was $9.3k with 12 months left of the fixed term)

Aware that there are banks (ie Bank of Melbourne that offer up to $4k cashback but they have a clause saying refinances within Westpac Group is ineligible etc etc - Are there any other banks outside the Westpac Group that currently do the $4k or more cashbacks?)

Contacted original a broker from 2.5 years ago but seems not interested now, was just advised that he'll look into it in Sep. (Last Nov he said "we'll look into it in Jan…" blah blah…)

TBH - I'm quite surprised with the high break fee calculated by the bank (that's probably how they fund their high-yield investment vehicles) - They're not very transparent (shock horror) when asking how the $5k was calculated… (not just the difference of the original rate vs current rate x months left remaining… as that would only be roughly $3.5k)

Other info that may be relevant:

• Variable rate after the 3yr fixed term will default back to around 4.58% approx.
• Original LVR was 75% 2.5 years ago. Now maybe around 65% LVR using the original valuation vs remaining loan. (Lower if value of the property has increased in that time.)
• Owner Occupied. Principal and Interest repayments
• May have a new job before Dec, which means I may not be a FTE yet by the time the fixed term of the loan expires. Which may affect home loan applications then.
• Your thoughts on Split 80% fixed (lower rate) & 20% variable (higher rate but flexibility to repay more)?
• Or your thoughts on fixing 100% vs staying on 100% variable in the coming 3 years.

Seeking tips from you OzFinance experts, considering majority of the commenters here seem to be have more than 1 property (and at least 6 figure packages going by previous polls… :) )

It's not in the OzBargain spirit to be saving a couple of dollars stacking (lowish value) deals here only to be bleeding (larger amounts of) money on the other end (home loan)

TIA!

TLDR - to break up with Westpac (fixed rate home loan) now or to let it run its course and reconsider in 6 months time?

Poll Options expired

• 2
  YES - Break Up Now!
• 32
  NO - Wait till term is over.

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Westpac

• 

  demiurge on 20/05/2021 - 22:46

  It's only 6 months. Just refinance when it runs out.

  • 

    d4w17dch17d on 20/05/2021 - 22:51

    are there any pros to leaving now? based on the info provided above?

• 

  djones145 on 20/05/2021 - 22:47

  +3

  dont leave meeeeee
  I'll changeeeeeee

  • 

    d4w17dch17d on 20/05/2021 - 22:49

    +2

    im already halfway out the door… :)

• 

  avoidfullprice on 20/05/2021 - 23:05

  You haven't actually done a comparison how much saving you make by switching now vs 6 months later. Comparing rate alone is meaningless.

  So find out in 6 months time:

  A) how much interest you pay if you wait it out and refinance

  B) how much fees and interest accured in new loan if you refinance today with a new bank

  Don't forget loan discharge/establishment/title fee's when refinancing with a new bank

  • 

    d4w17dch17d on 20/05/2021 - 23:18

    A - Around $8k
    B - Around $4.6k Int + establishment fee

    Loan discharge - is that normally part of the $5k break fee already? (Yes this high break fee makes this comparison lob sided. Are there any situation where the break fee that would make financial sense? Or is this always a high number from the bank to lock you in / guarantee their profits.)

    Reason for the 2.5 year itch:

    • May have a new job before Dec, which means I may not be a FTE yet (only contractor / probation) by the time the fixed term of the loan expires. Which may affect homeloan applications then.
    • 

      avoidfullprice on 20/05/2021 - 23:52

      Wouldn't B be 5k break fee on old loan + establishment/title fees + 4.6k int on new loan for 6 months?

      If you are going to refinance with another bank for A, then we can cancel out the transfer fees and cashback and leave with just A) 8k v.s. B) 9.6k? So choose A and stay put for 6 months?

      Not sure if your break fee includes discharge fees. It would actually be on the PDS when you first sign up the mortgage.

      Or is this always a high number from the bank to lock you in / guarantee their profits.

      But they offered you lower rate than variable. You took that offer. If you don't break you probably better off than stayed at variable.

      • 

        d4w17dch17d on 21/05/2021 - 00:05

        B - seems right, just wasnt expecting it to be $5k break…

        Whats the lesson here going forwards? Never fix 100%?

        When banks are offering lower 3yr fix rates than variable - are they expecting variable rates to drop further in the coming 3 years?

        • 

          avoidfullprice on 21/05/2021 - 00:11

          +1

          @d4w17dch17d: I don't think you got your B right. But sure.

          I'm not sure there is a lesson to be learned here. Like if you get married, then divorce, and have to give up half your asset, the lesson won't be to not get married. Circumstances change for people over time.

          Fix rates and variable rates come from different bill swap/bonds market.

          • 

            d4w17dch17d on 21/05/2021 - 00:30

            @avoidfullprice: I was referring to your calculation of B - $9.6k - which seems about right. If break was less, say under $3k it may have made it more (financially) feasible / logical.

            I guess lesson here for me - if my goal was to pay off as much of the loan as quickly as possible, then the 0.2% discount 2.5 years ago (fix vs variable) wasnt worth the trade off. Sure no one couldve known then that rates would be as low as they are now, but it helps to have flexibility so perhaps a split fix / variable maybe the go forwards? (low rate fix + flexibility of a variable)

            Lets say the rates did go up while I was on the fixed term (as what the media was saying 2.5 years ago) then I wouldnt be asking this question… so is betting on a split the way to go forwards? Or is there still a lose-lose scenario there I havnt accounted for yet?

• 

  Gelato on 21/05/2021 - 00:06

  Not sure if there is any status change, but i heard refinancing home loan is taking months ~2-3 months, so by the time you set up the new loan in the new bank, it may already be August.

  Then by the time you receive your $4k cashback, it may be Dec…

  • 

    d4w17dch17d on 21/05/2021 - 00:16

    Interesting… if thats the case then the break fee "should" only get lower as it gets closer to Dec, in theory.. if low enough then the cash back may even cover it fully. I definitely dont want to be left holding the bag after Dec after the fixed term finishes and it goes to their floating rate of 4.58% (based on todays figures) so preempting the question to refinance early..

    • 

      PartyNextDoor on 21/05/2021 - 07:06

      +2

      Start the application process with enough time for everything to get done with your new lender and then choose the settlement date when your fixed period ends. You don't need to guess when everything will be done. Just be transparent with your new lender and they will talk you through what you need to do. I started my refinance four weeks before my fixed rate ended last year but didn't realise it takes on average 6 weeks (back then) for refinancing to be settled. Lucky it only took about five weeks, so I was only stuck paying the higher interest rate (you know the one they revert you to for being a loyal customer) for a week with my old lender. You don't want to break your fixed rate before it ends since from my understanding you would just be paying the interest twice for that period, the break fee which is the interest remaining and the interest on your new loan.

• 

  El-Rhi on 21/05/2021 - 09:41

  I’d break it and refinance elsewhere and get a $4k cashback…. after refinancing fees that would cover around $3k of the break costs. Also be aware that fixed rates will start to go up over the next 6 months so if your plan was to re-fix at a very low rate then now would be the time.

  • 

    d4w17dch17d on 22/05/2021 - 08:39

    Good point… "Also be aware that fixed rates will start to go up over the next 6 months" is this a matter of fact tho? (and not just the media pushing something they dont really have control over? Is there a scenario where banks dont increase their fixed? Or is this pretty much expected.

    • 

      El-Rhi on 22/05/2021 - 09:10

      Yes, it’s a matter of fact… although the shorter term fixed rates such as 1 or 2 years might stay lower for slightly longer. The RBA’s TFF is ending in June which means banks won’t have access to very cheap 3 year fixed funding hence fixed rates will go up on 3, 4, 5 year terms. CBA increased fixed rates yesterday on 4 and 5 year rates but it’s a sign all tenures will start to rise.

• 

  Seraphin7 on 21/05/2021 - 10:22

  Long story short - I currently have a 3 year home loan fixed with Westpac until Dec 2021. Rates at that time was at 3.69% (Which was about 0.2% lower than the equivalent variable rates back then, hence got suckered into fixing… and not long after, even pre covid, variable rates start getting much lower than my fixed rate.)

  How did you get "suckered" into fixing?

  • 

    d4w17dch17d on 22/05/2021 - 08:29

    I went for the lower rate upfront which only lasted a couple of months before rates started dropping and the variable rate started overtaking the fixed rate I was on. Between Dec 2018 and Feb 2020 (Precovid) the official cash rate dropped from 1.5% to 0.75%.

    Banks probably decided to make the fix lower than the variable to lock in short-sighted customers (like me) - knowing that the long term outlook was that rates were going go much lower (locking in higher profits from customer who fix at the higher rate).

    At this same period, the media was saying that back in 2018 the only way rates were going was up. It may have been too good to be true? Fixing at the lower rate while the media was saying its only going up from here…

    If the fixed rate is lower than variable, it makes you wonder, from the banks point of view why they do it like that when their goal is to maximise profit…

• 

  [Deactivated] on 21/05/2021 - 23:19

  Remember mortgage bonds that were central to the whole financial crisis of 2008? They were based on fixed term loans.

  Why do banks like fixed term loans? Because they pretty much guarantee a rate of return over several years. Other institutions can then buy the loan (or a mix of loans, e.g. a mortgage bond) and get a relatively low risk dependable rate of return over a well defined period.

  It is this expected return that forms the basis of the high penalty for breaking a fixed term loan.

  Variable rate loans, on the other hand, are an entirely different product. There's no break penalty. There's no expectation that you'll definately pay a certain amount over a fixed period of time.

  If you want freedom go with the variable rate loan. It is riskier if interest rates were to suddenly go up, but you're free to switch any time you like with little pain.

  • 

    d4w17dch17d on 22/05/2021 - 08:32

    How about a split loan, part fixed part variable? Freedom of being able to pay more with the benefit of the lower rate (if bank variable rates dont overtake the fixed rate again that is…)

    • 

      [Deactivated] on 22/05/2021 - 08:51

      Check the conditions but there's probably a hefty penalty for breaking the fixed part of a mortgage.

      Remember, to a bank a fixed rate mortgage is a promise of return. One way or another they're getting that profit, either by you seeing the fixed term through, or paying a penalty to break.

    • 

      GLO on 24/05/2021 - 22:38

      Have you considered this:
      1. break current loan (to take advantage of lower rates now before rates increase)
      2. Create multiple fixed loans (leverage the top up facility without penalty)
      3. Also add a variable interest loan account

      Not to mention having an offset account against your largest fixed loan account.

      • 

        d4w17dch17d on 01/06/2021 - 19:05

        2. Create multiple fixed loans (leverage the top up facility without penalty)

        • wow, hold up, is that even possible? would you need to pay establishment fee for each?? Wouldnt 1 variable and 1 fixed be better? Pay off the variable part as much as you can.
• 

  GuyfromMelbourne on 01/06/2021 - 02:03

  The missing piece here is loan amount. Need that for calculations. I can possibly get you out of this situation with proven $ savings. But will charge you for time.

  Or the free tip is to submit a discharge form to Westpac and see if they come to table for negotiations, if not it's just a free form.

  • 

    d4w17dch17d on 01/06/2021 - 19:03

    $430k remaining.

    Its a fixed term loan tho - will they fall for that bluff requesting discharge papers knowing they have the upper hand (ie break fees)