Our home loan was fixed for 3 years and we have 12 months to go. I called our bank to check in on their current fixed rate options and they offered a lower fixed rate for another 3 years but they want to charge us a penalty for breaking our fixed rate loan. Is this normal process?

Hi Alex,

Yes it is unfortunately. The bank ties up the funds for the nominated period and expects a certain return on those funds for that time. The way they work it out is complicated and I can't explain it but the "Break Fee" as it may be called is basically the interest that the Bank is missing out on for the remaining part of the original term, ie if you initially wanted a 3 year fixed term and have had the loan for 2 years, you are paying the remaining 1 year's interest that the Bank would normally receive, plus other costs. Hope that explains it. It's one of the disadvantages of a fixed loan. So unless there is a compelling reason for getting out of the loan, ie you have to sell the house, you are stuck with the loan for another 12 months. Once that has expired, it will generally revert to the Standard Variable Rate unless you can negotiate a better deal with your existing bank, or with another lender.

Cheers,

Michael Budge
Bayside Finance Group
E michael@baysidefinance.com.au
M 0418 54 7337 T 1300 54 7337

Hi Alex,
Yes, this is a standard practise in fixed rate loans. The bank prices their risk according to the time frame of their committed funding and will charge a break fee to cover for potential lost interest earnings. You are smart to be reviewing the available rates ahead of the expiry of your current fixed rate and I would recommend a meeting to discuss your objectives and provide a detailed review of your options that may be beneficial either today or at the end of your term.
I look forward to the opportunity
Regards
Scott

Yes - best to wait till the 12 months is up and get in contact with a broker 2-3 months before - then review variable and fixed options.