What is a Break Cost / Early Repayment Charge?
What is an early repayment charge?
An early repayment charge may apply if a loan is fully repaid or you decide to switch to another interest rate before the end of its fixed rate period. It may also apply if a lump sum reduction is made, or if the overall repayment levels are increased before the end of the applicable fixed rate period.
Why does the Bank charge an early repayment charge?
The Bank charges borrowers an early repayment charge to recover the loss the Bank incurs when a loan is partially or fully repaid, the customer switches to another interest rate, or a loan is repaid at an accelerated rate before the end of the fixed rate period.
When a customer takes out a fixed rate loan the Bank will exchange fixed interest for floating interest in the wholesale market. This is done to match the interest it must pay on the money it borrows (from its depositors or other banks) to fund loans to customers. In return for offering the customer certainty of interest rates, the Bank requires certainty of income. Suppose the customer repays the loan before the end of its fixed-rate period, and relevant wholesale rates have fallen at the time of the proposed repayment. The Bank is still committed to pay fixed interest to the depositor (or other bank) for the remainder of the fixed rate period but is no longer receiving its fixed income from the customer. The early repayment charge calculates the loss to the Bank arising from this.
When is an early repayment charge incurred?
An early repayment charge will be incurred when the wholesale rate for the remainder of the fixed rate period at the time of early repayment) is lower than the original wholesale rate at the commencement of the fixed rate period (at the time the loan was fixed).
For example
A three-year fixed-rate loan of $100,000 is taken out. If the wholesale rate for three years at the commencement of the loan is 8%, the Bank exchanges three years of 8% fixed interest for floating interest in the wholesale market. After two years the customer fully repays the loan, even though there is still one year left to run on the fixed rate period.
The Bank is left with the obligation to pay 8% interest for one year in return for floating interest, but it can exchange this back again. However, suppose by this time the one-year wholesale rate is 6% p.a. An early repayment charge will apply because the current wholesale rate is lower than that of the original exchange.
How is the early repayment charge calculated?
An early repayment charge will apply if the wholesale rate at the time of early repayment is lower than the wholesale rate at the commencement of the fixed rate period. The early repayment charge is based on the following three key factors:
The amount of the loan being repaid
How much lower current wholesale rates are compared to the original wholesale rate at the commencement of the fixed rate period
The time left on the fixed rate period.
Under what conditions will no charge apply?
No early repayment charge will apply if the relevant wholesale rate for the remainder of the fixed rate period is higher than, or the same rate as the original wholesale rate. No early repayment charge will be
charged for customers with fixed rate loans (other than the Classic Home Loan), where they make a lump sum repayment and/or increase their repayments in any 12-month period during the applicable fixed rate period, as long as the extra repayments and lump sum repayments do not exceed 5% p.a. of the loan amount at the start of the fixed rate period. With our Classic Home Loan early repayment charges may apply to any lump sum repayment made during a fixed rate period.
Options available
If you have a fixed-rate home loan and are moving houses, you can avoid paying an early repayment charge using our Portable Home Loan feature by taking your home loan with you.
If you want to pay the early repayment charge and take a new loan at a lower rate for a longer period, or for more information, talk to your BNZ representative. The tables on the (see document attached) give an indication of the early repayment charge for every $1,000 principal repaid early.
Source: BNZ