Generally, making extra repayments on your home loan is good because you pay off your mortgage quicker and significantly reduce the amount of interest you pay. But, if you are on a fixed-rate loan, making extra repayments may actually cost you. This cost is called break fees.
In this article, we will tell you everything you need to know about break fees, including how to use a break cost calculator to reduce what you may have to pay…. Let’s dive in.
Generally, making extra repayments on your home loan is good because you pay off your mortgage quicker and significantly reduce the amount of interest you pay. But, if you are on a fixed-rate loan, making extra repayments may actually cost you. This cost is called break fees.
In this article, we will tell you everything you need to know about break fees, including how to use a break cost calculator to reduce what you may have to pay…
What Are Break Costs?
A break cost—also known as a break fee— is a fee you pay if you repay your fixed-rate loan or switch to a different loan type (e.g. variable rate loan) before your fixed-rate period is over.
Simply put, if you take a fixed-rate loan for 5 years and then pay it off in 3 years, the bank will charge you a break fee. This is because when you close off your loan earlier, you are ‘breaking’ the contract you made with the bank.
Read more here – Fixed interest rates—the comprehensive guide
Why Do Lenders Charge Break Fees?
As we mentioned above, lenders charge break fees to offset losses they make when you breach your fixed-rate contract.
How does the bank make a loss when I close my fixed rate early?
The money that the bank uses to fund your fixed-rate loan is borrowed from the wholesale money markets at a wholesale interest rate. This wholesale interest rate is based on the repayments you agreed to make until your fixed-rate period ends. Unlike you, the bank does not have the option to pay back their wholesale money-market loan early. So, even if you repay your fixed-rate loan early, the bank will still need to keep paying off their loan without your repayments. Sometimes they can lend the money to someone else, but they will still have to pay a higher rate from the money market.
This is a cost that the banks have to carry, and they usually pass it on to you. So, if wholesale interest rates change and the original wholesale price that the bank fixed for you is different to the new wholesale price, the difference is what the bank will charge you as part of the break fees…
When Do I Pay Break Costs?
The specific situations when you may be asked to pay break fees depend on the terms and conditions of your fixed-rate loan. As a general guideline, break fees will be applicable in the following situations:
- If you fully repay your home loan before the fixed-rate term is over. So if you fix your rate for 5 years and then pay off the entire loan in 3 years, your lender may require you to pay break costs.
- You decide to sell the property during the fixed-rate term.
- You make additional payments above the amount you set in the loan agreement with your lender.
- You default on your loan, and the total amount owing becomes due.
- You change your loan type, e.g. from a fixed-rate to a variable rate loan.
- You switch from your current lender to a new one.
Find out more here.
How Do I Calculate Fixed-Rate Break Costs?
Every bank has a different way of calculating break fees. Still, the break costs are generally calculated by multiplying the total loan amount by the remaining fixed term and the difference in the cost of funds for the bank.
Break cost = total loan amount x time remaining on your fixed-term contract x difference in cost of funds.
Looking at this formula, you can tell that break fees will be very high for long fixed-rate terms (e.g. 15 years) and also for a very large loan amount. So, you may need to make some serious considerations before fixing a 2 million dollar loan for 15 years! Book a free assessment with us to find out if fixing is right for you.
This formula is just a guideline, and each specific lender has different ways to calculate the break fees. Your loan contract usually states the formula your lender uses to calculate break fees.
Can I Avoid Paying Break Costs?
Once again, this depends on the bank you are using. Most major lenders are pretty tight about their fixed-rate loans and won’t even allow you to make extra repayments – without charging you extra, of course.
However, some lenders, especially building societies, have flexible fixed-rate loans, and some even allow unlimited additional repayments.
Here is a list of the common lenders, the name they use for their fixed rate home loan product, the maximum amount you can make in extra repayments and what they call break fees. For example, Commonwealth Bank refers to break fees as Early Repayment Adjustment.
| Bank | Product | Amount | Name |
| CBA | Commonwealth Bank Fixed Rate Wealth Package Home Loan | Up to $10,000 per year | Early Repayment Adjustment (ERA) |
| NAB | NAB Choice Package Fixed Rate Home Loan | $20,000 during your entire fixed rate period | Prepayment fee and economic cost |
| Westpac | Fixed Options Home Loan | $30,000 throughout the fixed rate period | Break costs |
| ANZ | ANZ Fixed Interest Rate (with Breakfree Package) | Lower of $5,000 per year, or 5% of the original loan amount | Early Repayment Fee (ERF) |
| St George | Fixed Rate Home Loan – Owner Occupied | $10,000 per year | Break costs |
| Suncorp | Suncorp Fixed Rate Home Loan in Home Package Plus | $499.99 in addition to your monthly repayment | Early payment interest adjustment (EPIA) |
| Bankwest | Fixed Rate Home Loan | $10,000 per year | Break Costs |
Please Note: Lenders change their policies from time to time, and this information is accurate as of June 2022. Make sure to constantly check with your bank to get the latest updates. This information is just a guide.
Some lenders allow you a 100% offset account with a fixed-rate loan, while others will even go as far as giving you a full line of credit. So make sure to talk to your mortgage broker to find the best deal for you!
Bonus: How To Request A Break Cost Quote
If you want to break your fixed-term and know how much your bank will charge you, ask them to calculate the break fees for you. After this, they will usually give you a break-cost quote. Bear in mind that break cost quotes are usually valid for only 5 days from the day they are issued. This means that you have to put in your request to break the fixed term before the end of those 5 days.
So if you get a break cost quote on Monday, you have to put in your request by end of day Friday.
Bonus: What If Interest Rates Change?
The impact of an interest rate change on your fixed-rate loan depends on whether the interest rates have gone up or down.
If interest rates increase, will I have to pay fixed-rate break costs if I repay my loan early?
If rates increase, you might not be required to pay break costs. This is because, when interest rates increase, the bank will make money from you repaying your loan early. But remember that some banks may try to be clever and charge you break fees anyway. So, please do your due diligence and ask them how they are calculating these break fees and by what margin the money market rates have changed.
If interest rates decrease, should I refinance or pay break fees?
Let’s say you are on a 5% fixed-rate loan with only 1 year remaining on your fixed-rate term, and the interest rates decrease to 4%. When you do the calculations, you may see that it might end up costing you the same to refinance (because of break fees) as it would if you just continued paying the higher fixed rate for the remaining year. So it may just be better to finish off the remaining fixed-term because the break fees will erase any benefit from the lower interest rate.
In short, refinancing because interest rates have gone down depends on how much time you have left on your fixed term and by what margin the interest rates have gone down.
So, if you are considering refinancing purely to take advantage of a lower interest rate, talk to your mortgage broker first, and they will advise you on the best path.
Next Steps On Getting Your Home Loan Approved
Our team at Hunter Galloway is here to help you buy a home in Brisbane. Unlike other mortgage brokers who are just one-person operations, we have an entire team of experts dedicated to helping make your home loan journey as simple as possible.
If you want to get started, please give us a call on 1300 088 065 or book a free assessment online to see how we can help.
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