MTPockets

Crikey, they make it so clear... What you need from them is the amount still owed. You can then plug that into a mortgage calculator to work out two different total amounts that would be paid using 2 different rates over the remaining time period, and subtract one from the other (adjusting the original one for any annual permitted overpayments). It won't be exact but should give a good idea.

I don't fully understand their wording, but I think it's this:

Actually, that's wrong as I don't think it accounts for completely paying it off (only part payments) - but the principle is the same.

TeamEmbo

They use the rate that was applied to them (the bank) when they borrowed the money before lending it to you, but I'm not sure if that's for the first or second part of the calculation. I recently enquired about buying out of our fixed rate. I asked what the formula was exactly and kind of understood at the time, without being given the actual formula itself. But I do remember being told about the buying in lending rate to the bank being used and that was not something that the bank would disclose to me, so it seems only the bank can work out the correct amount.

comet555

Here's the copy of the formula that was given in our Macquarie contract last year. We didn't actually have a fixed mortgage, but the formula was in there as part of the standard package.

I'm a math teacher and that is sort of all a big mess unless of course they give me an example with some numbers to follow (which of course they don't).

We had our mortgage with them for about a year (variable) and it still cost me $2500 to break it and switch over to another company. It was worth it though!

So, for anyone who is interested here it is.

Geelong Gent

It says it applies to fixed rate periods?

milly123

Only way out is to pay or port ,of any fixed Mortgage.

I complained and complained, Even got a guy from head office to call me to go through it all again and again, with the same outcome, MY Fault should have read the documents in full. NoBody expected the interest rate drops, and the more they drop, the more the pay out fee is.

As explained to me, the bank borrow's at the high fee too, so when you pay back the money's, and the bank can now only relend it at the new low rate, Somebody has to be liable for the bit in the middle.

comet555

Yes it does, although I would assume that if your entire loan is fixed for say 3 years, then your fixed rate period would be the full 3 years. I could be wrong about that though.

There may be other ways to arrange your loan, part fixed, part variable possibly for different time frames. No idea, but there could be more to it.

sammyg

[QUOTE
For my part I believe that people employed by banks are likely to be much better informed than I am about the future direction of interest rates and exchange rates. I therefore choose not to bet against them.

QUOTE]

Haha - yeah we're really glad we didn't take our westpac 'financial advisors' advice to fix in at 9.5% 5 months ago.

"The fixed rate is only 9.5% so you can see which way rates are going to go" she said

luckily we do have our heads screwed on but i'm sure she will have stung many other punters with this approach.

MTPockets

Good to hear you didn't listen to them. There was a Today Tonight program on the issue (ok it is a sensationalist show and not exactly in depth/rounded) but I think they make a fair point.

http://au.video.yahoo.com/watch/4096328/11051931

That formula above - how the heck is the average person meant to interpret it. If not explained I think there's a good argument to dispute it.

For what it's worth, just multiplying the outstanding by the difference in rates and number of years left gives the same result as the overly confusing equation anyway. Anyway, don't mean to be pedantic, but this sort of thing really annoys me - the onus should be on the banks to explain things adequately - as all the current problems are highlighting.

BadgeIsBack

It's a comment on what the fee is... which as you say may be different to what happens elsewhere. But certainly fees apply for most fixed mortgages.

Swerv-o

Jeez... The only thing missing is some integrals and a couple of exponents for good measure. And maybe a sin theta.


S

comet555

Yes I know.... I suppose they could always ask for you to throw in your first born child as well!

MTPockets

I’m not disputing fees, just that there’s a big difference between 3% of outstanding & 4% rate differential applied for the mortgage term. The banks (and customers!) seem to be defending their position by arguing they have to cover the rate they borrowed at – which is rubbish, as I don’t think people realise how it works.

CBA 5 fixed rate is 6.64%. When a bank offers this they estimate the likely popularity (let’s say $500m total – they’ll underestimate to ensure they’re not caught by any jump in rates) and fund it using short dated debt like commercial paper (CP).

Because that future CP variable portion is uncertain, one way of dealing with it is to arrange something called an interest rate swap. What this does is enable them to cover their future fixed rate cash flows from mortgage payments by paying a fixed rate to another bank, and in turn receiving a variable rate tied to LIBOR. That variable rate will also closely track CP rates thus covering that element of the risk too. (In reality they’ll probably use an amortising rate swap which accounts for the likelihood of early repayment if rates fall but the principle is the same - except it amortises).

Today 5y swap rates are around 3.8% and even if they called up another bank for a price in 500m to pay a fixed rate (and receive variable rate) the worse they’ll have to pay will be about 3.82%. In addition to that, interest rate swaps are off balance sheet so the only element they have to account for is the effect of change of rates on the notional $500m (not the 500m itself), which frees up more capital to repeat the process.

Admittedly there are risks of defaults, pre-payment, salaries to pay etc and there are also costs to keep rolling over that short term debt (CP). Assuming the CP debt costs them another 0.2%, nevertheless on that 500m they could have earned up to about $65m ((6.64-(3.8+0.02+0.02) x risk of 500m 5y x 100), and they’ve covered their risk. So if you take out a 500k mortgage the bank has already made up to $64k on you (before additional interest). Even if they use an amortising swap to hedge it - which may cost 1% more because it's tailored and elimates all risk, they still make around $40k. In the meantime they charge a set-up fee, monthly service fee then another 4% in break fees if you want to get out of it.

Makes the break-fee pretty unfair to me.

jayr

Much as I am not a fan of the big banks or the fees they charge, the issue is whether or not the mortgagee knew what they were getting into when they entered a fixed rate deal.

Someone else posted on here the description by one of the banks of how they would make that calculation and while in poorly constructed English it was not actually difficult to follow what would be done.

The fact that a bank does not actually bear that interest rate risk themselves due to hedging should not really be a benefit to the mortgagee as they played no part in that and would not independently be able to access that rate.

Fair or not, buyers have willingly entered into these risks

MTPockets

I do agree with you on that point - where the risks are explained. Maybe the banks could also do a better job of also explaining how mortgagees could themselves hedge the risk (through options/forwards - in the same way as FX deals - as they certainly don't give people money back if rates move in their favour). All just about more information really as I think the last year has shown how little the average person understands about banking.

I guess I'm also equally annoyed with the extent of consumer inertia (as much as with the banks) that have facilitated them being so exorbitant to begin with. I just hate apathy.

jayr

I am pretty usre that many will have had their lender "advise" them to take out a fixed rate even though they should be trained not to actually provide such advice which can clealry amount to misselling and may have them fall foul of their AFS Licence.

I agree on the inertia thing and am guilty of that in the case of my own bank and my telecom provider, Telstra, whom I hate with a passion.