New Zealand Institute for the study of competition and regulation inc.

Abstract

We examine the decision to prepay a fixed rate mortgage in the UK, Canada, Ireland, Australia and New Zealand. These countries are characterised by having substantial fees which are associated with breaking a fixed rate mortgage. We develop a model which allows for fluctuations both in banks' wholesale rates and credit spreads. We find that households can achieve economically significant benefits both from following an optimal prepayment strategy contingent on the break fee used by their bank, and also by selection of fixed interest rate term and (where available) break fee structure.