Links to useful articles
From time to time as useful articles are discovered, they will be posted here, or linked to. Read, learn and enjoy the peace of mind that comes from knowing you are in control of your mortgage, not the other way around!
Early Repayment Adjustments (ERA's) How are they worked out?
At some point yopu are likely to be faced with the possibility of paying an ERA or "break fee". This is a fee charged by your lender to change the terms of your mortgage while still in the middile of a fixed rate term. Remember that by chosing a fixed rate you have locked in your interest rate and repayments for a selected term. If you want to change the terms later your lender may charge you a fee in compensation for "changing the deal"
Exactly how this fee is worked out can differ from bank to bank, which creates confusion, however through recent research I have discovered how one lender calculates theirs. Here's how it goes:
The lender compares the interest rate you are currently on with the current market rate for the same period. So if you have a fixed term of 3 years, your current interest rate will be compared against the market rate for a 3 year fixed term loan. If your old rate is higher than the new rate you will be charged a fee. If your old rate is lower than the market rate, you will be allowed to change at no charge (as you are moving to a higher interest rate, which is good for them).
If an ERA is payable, it is based on the difference in interest you would pay over the rest of your fixed rate period under the different rates. For example, if you were on an 8% rate fixed for 3 years and wanted to break it, and the current 3 year fixed interest rate was 7%, you would be charged an ERA. The amount of the ERA would be the difference between what you'd pay on 7% for the rest of the term and what you'd pay on 8% for the rest of the term.