Understanding economic costs on a fixed rate loan

If you’re thinking about fixing your home loan’s interest rate, you need to know about economic costs (especially if you harbour hopes of paying your loan off early). Here we discuss the concept of economic costs – and find out when it’s charged, how it’s calculated, and what you can do to avoid it.

What are ‘economic costs’?

When NAB lends you money for a fixed period of time, we borrow it from the financial markets. This consists of funds from other banks, customer deposits, blue chip investors etc.

The interest rate on the money we borrow is known as the ‘cost of funds’. If you make additional repayments, or pay out your fixed rate loan early, the original loan term remains the same. Accordingly, an economic cost is charged to us and this is why we pass this cost on to you.

Further information about economic costs is available in our brochure:

Early repayment of fixed rate home loans

When could I be charged economic costs?

During a a fixed rate period when you:

  • make extra repayments

  • pay out your loan early

  • switch to a different interest rate

  • switch from a fixed rate loan to a variable rate loan.

Can I make extra repayments?

Some loans allow you to make extra repayments without being charged economic costs. Our NAB fixed rate home loans, for instance, allow you to make up to $20,000 in extra repayments during a fixed rate period without incurring economic costs.

How are economic costs calculated?

The things NAB will look at include:

  • the change in the cost of funds since you took out your fixed rate loan

  • the term remaining in the fixed rate period

  • the amount you’re repaying.

If the cost of funds drops and you pay off more than the scheduled repayments, you could be charged economic costs.

How much are economic costs?

The cost of funds changes each day—which obviously affects the calculation of economic costs. You’ll need to talk to your home loan specialist or banker to get a quote. Talk to them before you pay it out or change your loan.

Avoiding economic cost

Economic costs can be considerable so think hard about the pros and cons of a fixed rate loan before you decide to fix it. If you’re hoping to pay your loan off early, then a fixed rate loan mightn’t be a great idea.

If you already have a fixed rate loan and you’re thinking about making extra repayments, talk to us on Ph: 07 3340 5117.

Source: NAB https://www.nab.com.au/personal/life-moments/home-property/buy-first-home/economic-costs

Reproduced with permission of National Australia Bank (‘NAB’). This article was original published at https://www.nab.com.au/personal/life-moments/home-property/buy-first-home/economic-costs

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