Continuing low interest rates are great for borrowers, but for those who locked in at higher rates for a long period of time and have seen prevailing rates drop away, it can be frustrating.

The very fair question to ask is “should I break my old fixed rate and take a new, cheaper one?”. It certainly makes sense on the surface - simply looking at moving from a higher rate to a lower rate but, like most things where the banks are concerned, the reality is a bit more complicated.

The most important thing to know is back when you got that great rate you signed a contract to say that you would see it through to completion. That contract guaranteed you would never pay any more than the rate agreed at the time, but it also guaranteed the bank you wouldn’t pay any less. If you break this contract there may well be a price to pay if the bank cannot lend out the same amount of money to someone else at the same rate (or better). The equation the bank uses for working break-fees out is complicated – like “Theory of Relativity” complicated. National Bank used to publish the formula for how they calculated them but, when they realised that Albert Einstein was the only one who could work it out – and he was dead – they stopped.

On behalf of our clients we now simply get the bank to tell us what the figure will be, which varies daily. Once we know this we can work out if it is worth breaking the loan and refixing. Further to this, it may be worth breaking the loan and moving to another bank as there are cash-backs we can arrange to help offset any break costs.

To add to the growing number of decisions that need to be made before you break a loan, there is also to option to split the resultant lending to further enhance savings and take advantage of your specific situation.

As you may have gathered, there is no easy answer to the question of breaking loans. It varies between banks, borrowers and what the rates are doing at any point in time. The good news is that we can help guide borrowers through the process and offer advice on what option would give the best outcome.

A better question than “should I refinance?” is, “should I find out if it makes sense to refinance?”. The answer to this question, every time, is “yes”.