Borrowers who are locked in to a fixed-rate mortgage however, may not be celebrating during times of lowering interest rates. When looking to refinance, they face a difficult choice: continue to pay a higher interest rate, or incur what is often thousands of dollars in penalty fees in order to break their current fixed contract.
They need to consider more than the interest rate – there can be a plethora of conditions attached to exit fees. For instance major banks charge upfront exit fees ranging from hundreds to over a thousand dollars. Charges can also be levied by the new lender.
While fees vary, a borrower who cancels his loan within the fixed period will usually be forced to compensate their mortgage provider for the “economic cost” of breaking their contract. As interest rates fall, this cost becomes greater, and it may already be too late for fixed borrowers to save by refinancing.
Such fees can often come as a shock to people who are on a fixed-term mortgage. They can be very are surprised when they hear what the break free cost is – often it can be far higher than people expect.