By Stephen Johnson
A massive interest rate cut this week has made more than 43,000 home borrowers Australia's biggest losers.
The costs of exiting an average fixed rate mortgage jumped to $18,000 because break fees for the loan rise as interest rates fall.
Banks charge break fees to exit fixed-rate home loans so they can meet interest payment obligations to term deposit customers.
The Reserve Bank of Australia (RBA) on Tuesday announced it would slash official interest rates by a full percentage point to a six and a half year low.
The 43,632 borrowers who opted for fixed-rate mortgages between March and August this year, when interest rates were at a decade-high peak, face hefty fees if they want to switch to a standard variable loan.
Official interest rates would have to fall to the lowest levels since February 1965 for these borrowers to recoup the cost of switching out of a fixed loan through cheaper mortgage repayments.
A borrower who took out an average $250,000 loan, fixed at nine per cent for three years back in June, faces an $18,000 exit fee if they want to move into a standard variable loan.
Leaving an equivalent $400,000 loan would incur a $29,000 charge, according to Canstar Cannex data of exit fees charged by the major banks.
Canstar Cannex senior financial analyst Harry Senlitonga said lenders typically charged higher "break fees" to exit fixed-rate loans when official interest rates were falling.
"The more the interest rate cut, the more the break cost," he said.
"For a borrower, the question they need to ask themself is how long you have left on a fixed rate and whether it's worth paying the fee or not."
Borrowers who took out a fixed rate loan in August would face higher exit fees than those who took out a mortgage in March, when the RBA was still talking up inflation as its biggest worry.
Two of Australia's big four banks matched the RBA's one percentage point rate cut, which took the overnight cash rate to 4.25 per cent.
Monthly repayments on a $250,000 standard variable home loan with the Commonwealth Bank and NAB fell to $1,678 as mortgage rates dropped to 6.74 per cent.
By comparison, borrowers on an equivalent nine per cent fixed rate loan are still paying $2,058 a month.
Switching from a $250,000 fixed rate to a lower standard variable loan would reduce mortgage repayments by $13,680 over three years at current interest rates.
Borrowers would only recoup the $18,000 cost of exiting an average, three-year fixed-rate loan if official interest rates fell by another 75 basis points - to a 44-year low of 3.5 per cent - and took standard variable mortgage rates to under six per cent.
After this week's rate cut, a one-year term deposit account with a rural bank was offering six per cent interest on $1,000, updated figures from termdeposit.com.au say.
That would be good news for pensioners, who will get a $1,400 cheque on Tuesday if they're single or $2,100 if they're attached as part of the federal government's $10.4 billion economic stimulus package.
FIIG Securities head of research Justin McCarthy said the prospect of more rate cuts from the RBA in early 2009 would make a term deposit account a good investment.
"The RBA will cut rates further in the new year so it makes sense to lock in deposit rates before that occurs," he said.
Combined Pensioners and Superannuants Association policy co-ordinator Charmaine Crowe said only about 10 per cent of pensioners would be in a position to invest rather than spend their lump sum.