WESTPAC WARNING!!!
Oct 28th 2008, 4:59 pm
#31
Forum Regular
Thread Starter
Joined: May 2008
Location: Newcastle, NSW
Posts: 67
Re: WESTPAC WARNING!!!
As I said in an earlier post it might be worth ensuring there is a distinction between retail (what they can lend it out again at) and wholesale rates (what it costs them to sell the money back to their funders).
From my experience some financial institutions have treated the wholesale price as a proxy for the retail rate in setting up their systems for break fee calcs. That might be Ok in normal times, but with the way things have gone in recent months retail rates have decreased less than wholesale (the price of credit risk has gone up). For example on interest.co.nz your bank is still quoting 8.60% for standard 5 year mortgages today. Even if one could get a bit of a discount on that (as I'm sure you probably did when you took out your mortgage - say down to 8.3%), the interest rate differential would be less than 1%. This interest rate differential is the most important factor that will be used in any calculation, and so it is important it is right.
Also their calculation (and I think I mentioned this also) should always discount the monthly cost back to today's value (and over the best part of 5 years this will make a bit of difference too!)
I'm sorry the above may all sound a bit complex, but unfortunately the legislation is complex.
All the best.
ps if you are interested here is the formula that must be used if no alternative formula is defined in the contract. CCCFA Regulation 11 If you like a quick check is that the amount calculated with the above formula should always be a bit less than [outstanding balance] x [retail interest rate decrease] x [remaining fixed term].
From my experience some financial institutions have treated the wholesale price as a proxy for the retail rate in setting up their systems for break fee calcs. That might be Ok in normal times, but with the way things have gone in recent months retail rates have decreased less than wholesale (the price of credit risk has gone up). For example on interest.co.nz your bank is still quoting 8.60% for standard 5 year mortgages today. Even if one could get a bit of a discount on that (as I'm sure you probably did when you took out your mortgage - say down to 8.3%), the interest rate differential would be less than 1%. This interest rate differential is the most important factor that will be used in any calculation, and so it is important it is right.
Also their calculation (and I think I mentioned this also) should always discount the monthly cost back to today's value (and over the best part of 5 years this will make a bit of difference too!)
I'm sorry the above may all sound a bit complex, but unfortunately the legislation is complex.
All the best.
ps if you are interested here is the formula that must be used if no alternative formula is defined in the contract. CCCFA Regulation 11 If you like a quick check is that the amount calculated with the above formula should always be a bit less than [outstanding balance] x [retail interest rate decrease] x [remaining fixed term].
This info is really helpful and informative for us and we appreciate it.
You're right about the distinction between the retail and wholesale rates - unprecedented times means that banks are going to have to rethink...we hope in time to affect us
Oct 28th 2008, 6:19 pm
#32
BE Enthusiast
Joined: Oct 2002
Posts: 405
Re: WESTPAC WARNING!!!
Hmmm - Westpac's own link titled 'fixed interest rate loan repayment costs' from its ''Current Mortgage Rates' web page takes you to a page titled 'Prepayment Costs on Fixed Payment Loans', for which the URL is as follows:
http://www.westpac.co.nz/olcontent/olcontent.nsf/AttachmentsByTitle/Prepayment+cost+formula/$FILE/The+prepayment+cost+formula.pdf
THis is the simplified version of the extremely involved and complicated formula that they will ACTUALLY use, which was linked to by 'southerner' - I tried to at least get a rough estimation from the more complex formula as to whether or not $15,000 was right for a $270K loan on 5 year fixed, broken at 4 yrs & 4 months left to go, but after about an hour of working on it I decided I have better things to do, especially as, if I make one mistake and don't realize it I'll throw the whole thing off.
SO, to figure out the simplified version, you would have to know what the 'hedge rate' was on the day you took out the fixed loan, and know what the 'hedge rate' was on the day you broke the fixed loan. The question for many people will be: what the heck is the 'hedge rate'?? Is that the same thing as the fixed interest rate or not? How come, if you need to know the 'hedge rate', you can't even find a set definition for the term? How can you know what the 'hedge rate' is at any given time, including on the day you fixed your mortgage rate and on the day you want to break it? ANd how come the more complicated formula doesn't once mention 'hedge rate'?? The assumption will have to be then that the 'hedge rate' is the fixed interest rate, and in this case with 4 years 4 months remaining on the fixed rate term, it would be the 4 year fixed interest rate which applies for the day the fixed rate was broken, which for Westpac is at the moment sitting at 8.6%, a difference of .39% from 8.99%.Sorry but I can't get to more than $5000 in penalty owed based on the simplified version...??
http://www.westpac.co.nz/olcontent/olcontent.nsf/AttachmentsByTitle/Prepayment+cost+formula/$FILE/The+prepayment+cost+formula.pdf
THis is the simplified version of the extremely involved and complicated formula that they will ACTUALLY use, which was linked to by 'southerner' - I tried to at least get a rough estimation from the more complex formula as to whether or not $15,000 was right for a $270K loan on 5 year fixed, broken at 4 yrs & 4 months left to go, but after about an hour of working on it I decided I have better things to do, especially as, if I make one mistake and don't realize it I'll throw the whole thing off.
SO, to figure out the simplified version, you would have to know what the 'hedge rate' was on the day you took out the fixed loan, and know what the 'hedge rate' was on the day you broke the fixed loan. The question for many people will be: what the heck is the 'hedge rate'?? Is that the same thing as the fixed interest rate or not? How come, if you need to know the 'hedge rate', you can't even find a set definition for the term? How can you know what the 'hedge rate' is at any given time, including on the day you fixed your mortgage rate and on the day you want to break it? ANd how come the more complicated formula doesn't once mention 'hedge rate'?? The assumption will have to be then that the 'hedge rate' is the fixed interest rate, and in this case with 4 years 4 months remaining on the fixed rate term, it would be the 4 year fixed interest rate which applies for the day the fixed rate was broken, which for Westpac is at the moment sitting at 8.6%, a difference of .39% from 8.99%.Sorry but I can't get to more than $5000 in penalty owed based on the simplified version...??
Last edited by Black Sheep; Oct 28th 2008 at 6:55 pm.
Oct 28th 2008, 6:31 pm
#33
BE Enthusiast
Joined: Oct 2002
Posts: 405
Re: WESTPAC WARNING!!!
Oh, and by the way, there is a mistake in the formula used in the 'example' at the bottom of the page of the penalty calculator that southerner linked to. So how would we know if there isn't also a mistake in the actual formula?????????????????????
Oct 28th 2008, 8:22 pm
#34
Forum Regular
Thread Starter
Joined: May 2008
Location: Newcastle, NSW
Posts: 67
Re: WESTPAC WARNING!!!
Hmmm - Westpac's own link titled 'fixed interest rate loan repayment costs' from its ''Current Mortgage Rates' web page takes you to a page titled 'Prepayment Costs on Fixed Payment Loans', for which the URL is as follows:
http://www.westpac.co.nz/olcontent/olcontent.nsf/AttachmentsByTitle/Prepayment+cost+formula/$FILE/The+prepayment+cost+formula.pdf
THis is the simplified version of the extremely involved and complicated formula that they will ACTUALLY use, which was linked to by 'southerner' - I tried to at least get a rough estimation from the more complex formula as to whether or not $15,000 was right for a $270K loan on 5 year fixed, broken at 4 yrs & 4 months left to go, but after about an hour of working on it I decided I have better things to do, especially as, if I make one mistake and don't realize it I'll throw the whole thing off.
SO, to figure out the simplified version, you would have to know what the 'hedge rate' was on the day you took out the fixed loan, and know what the 'hedge rate' was on the day you broke the fixed loan. The question for many people will be: what the heck is the 'hedge rate'?? Is that the same thing as the fixed interest rate or not? How come, if you need to know the 'hedge rate', you can't even find a set definition for the term? How can you know what the 'hedge rate' is at any given time, including on the day you fixed your mortgage rate and on the day you want to break it? ANd how come the more complicated formula doesn't once mention 'hedge rate'?? The assumption will have to be then that the 'hedge rate' is the fixed interest rate, and in this case with 4 years 4 months remaining on the fixed rate term, it would be the 4 year fixed interest rate which applies for the day the fixed rate was broken, which for Westpac is at the moment sitting at 8.6%, a difference of .39% from 8.99%.Sorry but I can't get to more than $5000 in penalty owed based on the simplified version...??
http://www.westpac.co.nz/olcontent/olcontent.nsf/AttachmentsByTitle/Prepayment+cost+formula/$FILE/The+prepayment+cost+formula.pdf
THis is the simplified version of the extremely involved and complicated formula that they will ACTUALLY use, which was linked to by 'southerner' - I tried to at least get a rough estimation from the more complex formula as to whether or not $15,000 was right for a $270K loan on 5 year fixed, broken at 4 yrs & 4 months left to go, but after about an hour of working on it I decided I have better things to do, especially as, if I make one mistake and don't realize it I'll throw the whole thing off.
SO, to figure out the simplified version, you would have to know what the 'hedge rate' was on the day you took out the fixed loan, and know what the 'hedge rate' was on the day you broke the fixed loan. The question for many people will be: what the heck is the 'hedge rate'?? Is that the same thing as the fixed interest rate or not? How come, if you need to know the 'hedge rate', you can't even find a set definition for the term? How can you know what the 'hedge rate' is at any given time, including on the day you fixed your mortgage rate and on the day you want to break it? ANd how come the more complicated formula doesn't once mention 'hedge rate'?? The assumption will have to be then that the 'hedge rate' is the fixed interest rate, and in this case with 4 years 4 months remaining on the fixed rate term, it would be the 4 year fixed interest rate which applies for the day the fixed rate was broken, which for Westpac is at the moment sitting at 8.6%, a difference of .39% from 8.99%.Sorry but I can't get to more than $5000 in penalty owed based on the simplified version...??
Cheers for the efforts you have put into trying to make head or tale of these formulas - we too have struggled to see how they got it so high... and as we've said before, how can they produce such a figure without being able to explain categorically how they arrived at it??? or are they just making damned sure that they throw people off track??!!
It can easily make us feel out of our depth (we're sure that's part of their overall plan too)...
And the fact that Westpac's retail rates have not reduced so much from what we took out - don't get us started on that one !!!!!
Oct 29th 2008, 8:09 am
#35
Banned
Joined: Sep 2008
Location: AUCKLAND
Posts: 146
Re: WESTPAC WARNING!!!
This is really bad
Yes, it is true that the banks and financial advisors seem happy to use such loose terms like “might “ or “maybe” or "kind of”.
It seems that people in New Zealand are very vulnerable to such broad terminology and as you probably know a lot of the leaky homes are currently being dropped on the market here under the pretence of credit crunch bargains and there is no systems in place to protect potential purchasers
I really hope you sort this out with the bank because such loose factors could make a world of difference to folk and could end up with their finances in a mess and end up wishing they had never come to New Zealand or at least asked for stronger terms rather than a maybe
I wish you all the best and I certainly agree that if you don’t get any response from the bank then take it to the press, if nothing else it would be doing the right thing to warm others so they don’t fall into the same trap.
Oct 29th 2008, 11:31 am
#36
Forum Regular
Thread Starter
Joined: May 2008
Location: Newcastle, NSW
Posts: 67
Re: WESTPAC WARNING!!!
This is really bad
Yes, it is true that the banks and financial advisors seem happy to use such loose terms like “might “ or “maybe” or "kind of”.
It seems that people in New Zealand are very vulnerable to such broad terminology and as you probably know a lot of the leaky homes are currently being dropped on the market here under the pretence of credit crunch bargains and there is no systems in place to protect potential purchasers
I really hope you sort this out with the bank because such loose factors could make a world of difference to folk and could end up with their finances in a mess and end up wishing they had never come to New Zealand or at least asked for stronger terms rather than a maybe
I wish you all the best and I certainly agree that if you don’t get any response from the bank then take it to the press, if nothing else it would be doing the right thing to warm others so they don’t fall into the same trap.
Yes, it is true that the banks and financial advisors seem happy to use such loose terms like “might “ or “maybe” or "kind of”.
It seems that people in New Zealand are very vulnerable to such broad terminology and as you probably know a lot of the leaky homes are currently being dropped on the market here under the pretence of credit crunch bargains and there is no systems in place to protect potential purchasers
I really hope you sort this out with the bank because such loose factors could make a world of difference to folk and could end up with their finances in a mess and end up wishing they had never come to New Zealand or at least asked for stronger terms rather than a maybe
I wish you all the best and I certainly agree that if you don’t get any response from the bank then take it to the press, if nothing else it would be doing the right thing to warm others so they don’t fall into the same trap.
As we prepare to leave NZ it's fair to say this whole thing has left a (massively) bad taste in our mouth...
Penalties like this just can't be 'absorbed' into an average family's finances - there are far reaching consequences especially when they can't be planned for because, as discussed above by people, the formulas used to arrive at a figure are so vague. And the actual final figure provided by the bank is only absolutely valid three days before settlement - great to get so much notice!!
Oct 29th 2008, 11:41 am
#37
Banned
Joined: Sep 2008
Location: AUCKLAND
Posts: 146
Re: WESTPAC WARNING!!!
Thanks a lot.
As we prepare to leave NZ it's fair to say this whole thing has left a (massively) bad taste in our mouth...
Penalties like this just can't be 'absorbed' into an average family's finances - there are far reaching consequences especially when they can't be planned for because, as discussed above by people, the formulas used to arrive at a figure are so vague. And the actual final figure provided by the bank is only absolutely valid three days before settlement - great to get so much notice!!
As we prepare to leave NZ it's fair to say this whole thing has left a (massively) bad taste in our mouth...
Penalties like this just can't be 'absorbed' into an average family's finances - there are far reaching consequences especially when they can't be planned for because, as discussed above by people, the formulas used to arrive at a figure are so vague. And the actual final figure provided by the bank is only absolutely valid three days before settlement - great to get so much notice!!
Good luck mate
Oct 29th 2008, 11:45 am
#38
Forum Regular
Thread Starter
Joined: May 2008
Location: Newcastle, NSW
Posts: 67
