There is a lot of merit in what Jaxson says and his points about brokers are fair.
However without wanting to be pedantic, 'break costs' don't arise every time you break a fixed-rate arrangement with a bank. They only arise if rates have gone down since you fixed the rate. If rates have gone up, you can usually break the fixed rate arrangement with no cost. NZ will be in a generally rising rate environment for the next year or two so break costs are not likely to be an issue over that period. On the other hand, if rates are going up why would you want to break the fixed rate arrangement - unless you win lotto and want to repay. Even if you sell your house and buy another one, existing loans can be transferred to the new property without having to repay and running the risk of incurring a break cost.
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eracode: There is a lot of merit in what Jaxson says and his points about brokers are fair.
However without wanting to be pedantic, 'break costs' don't arise every time you break a fixed-rate arrangement with a bank. They only arise if rates have gone down since you fixed the rate. If rates have gone up, you can usually break the fixed rate arrangement with no cost. NZ will be in a generally rising rate environment for the next year or two so break costs are not likely to be an issue over that period. On the other hand, if rates are going up why would you want to break the fixed rate arrangement - unless you win lotto and want to repay. Even if you sell your house and buy another one, existing loans can be transferred to the new property without having to repay and running the risk of incurring a break cost.
Don't forget that you'll need to compare the current rate being paid to the rate nearest to the remaining fixed term. Given that NZ has finally returned to a positive yield curve for the time being, it's entirely possible, even in a time of generally rising interest rates to need to pay an ERA.
Other than that, I agree with everything else you said. You shouldn't need to pay one just because you've sold and bought a new house. You might want to break your fixed rate to get onto a different rate, fearing that conditions when the original term will be far worse.
In this regard anyway (ERAs), ASB has a very fair formula where you essentially prepay the present value of the difference in interest rates for the period between now and the end of your term. You agreed to that fixed rate, so you should have to pay the interest, you can't get out of it. It annoys me when I read in the paper about people complaining at the cost of the break fees. You agreed to a fixed rate of 9%, why shouldn't you have to pay that now, just because rates have plummeted? That's just your bad luck.
Having said that, I understand Kiwibank have some pretty unfair calculations that they use for their ERAs. Somehow they can argue it as "fair costs" but I'm not so sure. I stand to be corrected, if anyone from Kiwibank cares to detail their formula?
My wife and I had to pay break fees with Westpac even though rates had gone up over 2% not long ago, and they were substantial. (only 6 months early because we sold the house too!) Still paying off the $18000 we had to pay. Add that to the $22000 we lost on the house because my wife was made redundant and we had to sell in a hurry as we could no longer afford the mortgage payments. (My wife earnt way more than me)
Needless to say, read the fine print. And i definately recommend having some sort of payment insurance to cover you for disability, redundancy etc.
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I guess that's all I'm saying. The OP sounded possibly a bit new to all this (respectfully, no ill intent with that statement) so I thought it would be useful to discuss some of the other aspects of mortgages. Some of these don't come into play ever, but some do.
Banks use unique formulas for calculating break fees and it's not as clear cut as saying if rates go up then you don't have to pay. It's important to realise too that selling a house doesn't clear the remainder of your term, you still have to pay the interest the bank would earn in the remainder of the fixed term period.
If you transfer to another house which is less, some banks will allow you to transfer the bulk of the mortgage, and pay a break fee on the difference. Kiwibank was one I was aware of that may not do this, meaning you have to pay a break fee on the whole mortgage and then take out a full new one on the next house for the full amount.
Under normal circumstances it's all sweet. If however you can't be sure about the next 2 - 5 years of your life, then you may want to consider this before you fix at nice rates but for a long time. An example of this would be: Are you and your partner both working but there's a chance, however slim, that you may have kids in the years ahead and therefore drop to only one income?
I'm not being critical of the fixed term approach or a break fee. If you sign up for it then that's your choice and you should incur any costs should you choose to cross the terms of that agreement. This is meant to just raise awareness and hopefully be of some use to someone. Cheers.
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