Latest NewsExit Fees Might Kill Benefits of Better DealThursday, 20 April 2017

The exit fees lenders put on their fixed-rate home loans are rarely considered a cash grab by the ombudsman.

Moves among the big banks to scrap exit fees on variable home loans have been welcomed but, in the meantime, an increasing number of borrowers are turning to fixed rate loans that have a history of even higher "break costs".

The shift has prompted the credit ombudsman to write to mortgage brokers to enlist their help in ensuring borrowers understand the costs they face if they find a better deal before the term of their fixed rate loan expires.

While some people expect the new National Credit Protection Reform Package and unfair contract terms law to be the death knell for exit fees on variable loans, break costs on fixed rate loans will remain lawful as long as they continue to reflect the true cost to the lender of the contract being broken.

Less than two years ago there was a surge of complaints to the credit ombudsman and the banking ombudsman as borrowers learnt it would cost them, in some cases, tens of thousands of dollars to get out of fixed rate loans that had become increasingly uncompetitive as interest rates dived.

While such complaints have tapered off now that interest rates are rising rather than falling - so people are happy to have fixed - there's some concern the latest move towards fixed rate loans may be laying the foundations for a similar round of complaints once the interest-rate cycle turns.

"The danger is that a few years down the track, when we're into another round of interest rate cuts, people will want to go back to variable," says the credit ombudsman, Raj Venga.

Early last year, people were trying to get out of loans fixed at 9 per cent because they could get a rate of about 5 per cent. As of last week, the three-year fixed rates on offer ranged between 7.1 per cent and 8.1 per cent.

The most recent housing finance statistics show the proportion of properties being funded with a fixed rate loan at its highest in a year. In September, fixed rate loans accounted for 4.4 per cent of financings, compared with 3.4 per cent just a month earlier.

"The break costs for the loss the lender suffers as a result of a fixed rate loan being broken - because they have arrangements sitting behind it - will still apply," says the banking ombudsman, Philip Field. "The new law doesn't really change that. Lenders are still entitled to their reasonable costs."

Venga, who oversees non-bank lenders, says people may believe break fees are just to stop customers moving to another lender but there is a genuine reason for them.

Non-bank lenders try to compete with banks in terms of interest rates but don't have depositors to help them fund their lending, he says, which means they have to borrow money themselves.

"In order for them to [compete], they have to be able to recoup their costs," he says. It can take three to five years for a lender to break even on a loan.

"If you don't break off the loan, you don't pay," he says. "The trouble is a lot of people do refinance within three to five years."

When considering complaints, Venga and Field say their offices look at whether the charges reflect the reasonable costs to the lender, whether the potential liability was disclosed when the loan was arranged - this is where lenders need to be upfront and where brokers can help - and whether the calculations are correct.

"The lender can't profiteer, the fee can't be unconscionable," Venga says. "As long as it was disclosed and the lender can show us a breakdown where they have incurred the costs, we can't say it breaks the law."

Both Venga and Field say that in almost every recent case, the lender has been found to have applied the correct charge, legitimately.

"With fixed rate loans, it's very hard for the consumer to get out of it," Venga says. "Lenders don't tend to get it wrong."

Field says the cost of breaking a fixed rate loan can be very high without being incorrect or unlawful.

Venga says that's why he's writing to brokers "to say, 'This is the time people are taking out fixed rate loans, these are the things you should tell them."'

One way borrowers have gone wrong in the past is to ask the lender for a pay-out figure on their fixed rate loan then not act until some time later, when the break cost may well have changed.

When interest rates are moving quickly, the cost can change significantly in a short period, Venga says.

By the same token, Field says lenders sometimes miscalculate break costs by using the full amount still outstanding, rather than recognising that they would have been collecting interest on a debt that was reducing in size over time.

Field's advice to borrowers is to remember that fixed rate loans are about achieving certainty, not about trying to beat the bank in a game of interest-rate speculation.

"Banks have professional money-market people who make their best predictions about these things - and they don't always get it right," he says.

"I don't think ordinary consumers are necessarily as well-informed to take that gamble.

"If you're doing it because you want to bet against the bank, you might win, you might lose.

"If you're doing it because you don't want to pay more than X dollars for the next three years because you're going to have a baby and you want to manage whether interest rates go up or down, that's a good idea."

The research manager for Canstar Cannex, Chris Groth, says it can be tempting to fix a loan when interest rates are rising but "timing is crucial".

The company's research found there were only nine months in the past 36 months when a borrower would have had a lower monthly repayment by being on a fixed rate rather than the variable rate.

"Borrowers shouldn't be discouraged from looking to fix at least part of their loan, as fixing delivers repayment certainty, the potential to save money on repayments and an interest-rate buffer should rates rise further," Groth says.

"[But] borrowers should remember that they run the risk of losing money if rates decrease and that exiting early from a fixed loan may attract high fees."

Researcher RateCity's lowest three-year fixed rates are: Pacific Mortgage Group, 6.89 per cent; RESI Mortgage Corp, 6.98 per cent; Quick Direct Online Mortgages, 7.03 per cent; Reduce Home Loans, 7.04 per cent; and AMO Group, 7.07 per cent.

Key points

* Banks may be reviewing exit fees on variable loans but break costs on fixed rates still apply.

* Break costs can be much more substantial than any exit fee.

* Lenders are entitled to recover the costs of sourcing the now-discarded finance.

* Many people end up refinancing within three to five years.

* Fixed rate loans should be about certainty, not about interest rate speculation