Browse Forums Home Finance 1 Nov 10, 2008 9:42 pm Hi,
Just interested to find out if anyone knows. I have a fixed rate interest loan for 3 years at 8.89%. It is a progressive draw loan. So far have used only a small portion of the loan. If we break now, would we only be paying a break penalty on the amount we have used or the total amount? Cheers, Michelle Re: Fixed rate on Construction Loan 2Nov 11, 2008 1:57 am Break costs are calculated with a complex formula. The method of calculation should be in your loan agreement and your lender will calculate break costs as per your loan agreement.
You can easily get an estimate of break costs that applies to you by calling your lender. You don't need to be shy about that, it is quite a common question for them and they have spreadheet models that calculate this. Break costs are payable when the lender's wholesale market interest rates have dropped and your breaking causes a loss to them. It would only be a guess to say it is calculated on the original loan amount (not the balance) as the original loan amount is what was secured for you at the fixed rate. If there are any bankies amongst us, maybe they can provide some answers. Refinance, Fixed Rate Break Cost 4Nov 12, 2008 12:32 am I found this information on the net which explains it well (source acknowledged)
When do break costs apply? As a general rule, the longer the time remaining on your fixed loan, the larger the break cost will be. If the current interest rate is higher than the rate you locked in, it's likely you won’t be charged a break cost. On the other hand, if the current interest rate has fallen below what you are paying, you may be charged the difference multiplied by the outstanding balance multiplied by the years remaining in the fixed term. How can I compare break costs? You can't. There are so many variables involved. The daily movement of wholesale interest rates make calculations unreliable. This is particularly evident with the wild fluctuations we are seeing in the financial markets at the present time. However, the following hypothetical will give you an idea. Fred borrowed $250,000 on a 3-year fixed rate loan 6 months ago. The fixed rate was 9% and, at the time, the money market rate for a 3-year fixed loan was 7.44%. Fred now wants to refinance, with two and a half years to go on the loan. The money market rate for a 2.5 year fixed loan has now dropped to 5.55%. The total break cost is $10,300, based on the outstanding balance and the current money market rate. Before rushing to refinance to take advantage of low interest rates, think about the effect break costs could have on the time it takes to profit from a lower interest rate. The time to talk break costs is before you sign up for the loan. Ask your lender to explain the ramifications under a range of different scenarios. Source: Cannex web site Re: Fixed rate on Construction Loan 5Nov 12, 2008 6:12 am Thank you so much thlo. What wonderful information you have provided. Definitely won't be breaking my loan in that case.
Thanks again. Michelle Fixed Rate Break Costs, A warning 6Nov 12, 2008 4:45 pm mustangshelly Thank you so much thlo. Michelle All part of the service ma'am. PS.Actually I have had the same question a lot lately Re: Fixed rate on Construction Loan 7May 26, 2009 12:37 pm I was just trying to find some information about our construction loan, we have only recently activated it and we now see that the interest rate has dropped 0.1% which is good but for some reason we thought it was FIXED for the the term of the construction, I wouldn't think they have made a mistake but I don't really want to ask them just in case, I guess I need to look through the mountain of paperwork and see if I can spot anything. Have other people had an experience with fixed/variable construction loans? Re: Fixed rate on Construction Loan 8May 26, 2009 12:45 pm We had standard variable rate during construction( interest only but optional to pay extra off principal) and no choice to have it fixed - after settlement of house, loan reverted to standard principal and interest loan on variable rate - but we did have the option at that point of converting to something different- choice of fixed rates, line of credit etc. The biggest challenge will be if you take out a loan and then run out of money - you'll have an incomplete security and lenders do not like this so you can get stuck.… 2 18897 Thank you so much everyone. This all makes a lot of sense. I guess when you talk to a builder who butters up everything to look very polished, you get to start believing… 7 17511 So AFAIk the outcomes of the BAL ratings form part of a clause that allows them to pass these costs on to you. However the more relevant detail is how did it go from 19… 1 9142 |