What Are Break Costs?
Break costs are fees charged by lenders when you make extra repayments on a fixed-rate home loan. Most lenders will allow you to pay a small amount off of your mortgage each year without being charged. If you go over this amount or pay off the loan entirely then you will be charged a break cost.
But, banks don’t always disclose their break fees or how they will be calculated! For this reason, we’ve created this easy-to-follow guide for anyone considering a fixed-rate loan.
Use the mortgage break fees calculator to estimate your home loan exit fees.
Remember, paying a break fee isn’t always bad, you either pay the cost as a lump sum or you pay a higher rate of interest for the fixed-rate term. Currently, fixed-rate home loan interest rates are at record lows, and some banks and lenders are offering refinance rebates (cashback) as high as $4,000 to refinance your home loan.
In some cases, it may be better to refinance. You can use our break cost calculator above to determine just that.
Can You Avoid Break Fees For Fixed-Rate Loans?
In most cases, the answer is no. Lenders typically impose break fees if you refinance out of a fixed-rate home loan or sell your house before the term ends. One of the lenders on our panel is currently making an exception, offering 2-year, fixed-rate loans that allow borrowers who qualify to refinance to a variable rate during the term without paying break fees.
Interest rates start at 5.59% (5.77% comparison rate), the same as the rate on the corresponding variable-rate product. The package also allows homebuyers to make additional repayments with no cap or penalty. Apply by 12 May 2023 to take advantage of the offer.
Don’t Miss Out On A Flexible Home Loan Solution!
Getting a two-year fixed rate while keeping the option to switch to a variable rate if interest rates go down can offer some certainty to homeowners who have been dealing with rising interest rates for a year. Our experts can help you find out if you’re eligible and guide you through the application process. Call us on 1300 889 743 or complete our free online assessment form to get started!
Did The Government Ban Exit Fees?
All variable mortgages advanced on or after the 1st of July 2011 have no early repayment penalties or exit fees.
However, fixed-rate break costs and discharge fees still apply. If your home loan is fixed or if it was set up before July 2011, you may still have significant exit fees.
Every home loan has a small discharge fee (typically $350 per property), which covers the cost of the lender removing the mortgage that has been registered on the title of your property.
This fee is reasonable as it’s an actual cost incurred by the bank and, hence, discharge fees have not been banned by the government.
How Much Can I Repay Without Break Fees?
That depends on which lender you’re using!
The major banks are relatively inflexible with extra repayments on their fixed-rate home loans.
Luckily, some building societies offer flexible fixed-rate loans which allow unlimited additional repayments:
- Commonwealth Bank (CBA): $10,000 per annum.
- National Australia Bank (NAB): $20,000 during the fixed-rate term ($0 for some loans).
- Westpac (WBC): $30,000 during the fixed rate term.
- Australia and New Zealand Bank (ANZ): $5,000 per annum OR 5% of the original loan amount, whichever is the lesser.
- St George Bank (SGB/StG): $10,000 per annum.
- Rams: $30,000 during the fixed rate term.
- Suncorp: $499.99 per month more than the normal monthly repayments.
- BankWest: $10,000 per annum.
- Specialist fixed-rate lenders: Unlimited additional repayments and redraw as long as the loan account isn’t closed completely. Please refer to our page about fixed rates with unlimited extra repayments.
IMPORTANT: Banks change their policy from time to time so this information is current only accurate at the time that it was written. You should always check with your lender just to be sure. This information should be used as a guide only.
Be careful if you have a loan with a lender such as NAB or ANZ because they don’t automatically reduce your repayments. If you pay off the maximum amount allowable then your next payment may take you over your limit, resulting in the bank charging you bank fees!
You should call your lender to discuss any lump sum repayments you plan to make on your fixed-rate loan.
What Other Names Do Lenders Use For Break Costs?
Different banks use different names for their break costs. Some common names include economic costs, exit fees, early repayment adjustment, or prepayment fees. Here are some terminologies used by the major lender across Australia:
- Commonwealth Bank (CBA): Early repayment adjustment (ERA).
- National Australia Bank (NAB): Prepayment fees and economic cost.
- Westpac (WBC): Break costs.
- Australia and New Zealand Bank (ANZ): Early repayment fee (ERF).
- St George Bank (SGB/StG): Break costs.
- Rams: Fixed-rate early termination fee & Fixed-rate unwind adjustment.
- Suncorp: Early payment interest adjustment (EPIA).
- BankWest: Break costs.
All of these different names refer to the same fees for paying off part or all of a fixed-rate loan early.
Why Do Banks Charge This Fee?
When a bank funds a fixed-rate loan, they borrow money from the wholesale money markets using the Bank Bill Swap Rate (BBSR or BBSW). Their BBSW rate is locked in at the same time as your interest rate. However, they don’t have the option to repay their loan early. When you repay your home loan, they have to lend the money to someone else yet still pay a high rate on their loan from the money markets.
Sometimes, the Bank Bill Swap Rate on the wholesale market falls between when you fixed your rate and when you pay off your loan. When this happens, the bank has an “economic cost” to carry until their loan from the money market is ready to be repaid. They pass this cost on to you as a break cost.
What Else Can Cause A Break Fee To Be Charged?
You should refer to the terms and conditions of your home loan for the specific situations where you may be charged a break fee. As a rule of thumb, a break fee will apply if:
- You repay the loan in full before the end of the fixed-rate term; or
- You sell the property within the fixed-rate term; or
- You make the repayment in excess of the allowed amount set in the loan agreement with your bank; or
- The total amount owing on your loan becomes immediately due for payment because you are in default; or
- You switch to another loan type (e.g. you switch to a variable interest rate).
How Are Break Costs Calculated?
Home loan break costs are calculated by determining the difference between the wholesale interest rates when you apply for your mortgage and when the loan is repaid early. This difference is then multiplied by the loan amount and the remaining term of the loan. Each lender has its own method for calculating these fees, detailed in your loan contract.
Example Calculation:
Umka takes out a $400,000 loan with a fixed interest rate of 5% a year for a term of five years. This 5% rate is known as the funding cost for the lender.
Two years into her loan, Umka decides to sell her property and fully repay her home loan. At this point, she has a remaining loan balance of $387,208 and three years left on her fixed-rate term. The wholesale market swap rate for a three-year fixed term is currently 3% a year. For the next three years, the lender’s funding cost remains at 5% a year, while the market rate has dropped to 3% annually. The lender estimates a loss based on the difference between these rates, which is 2% annually (5% – 3% = 2%).
When Umka sells her property, she decides to pay off her loan in full, including the break cost and administration fee for ending the fixed-rate term.
The break cost calculation is as follows:
- Current Home Loan Balance: $387,208
- Remaining Fixed-Rate Term: 3 years
- Difference in Swap Rates: 2% a year
Break cost formula:
Current home loan balance X remaining fixed-rate term X the difference in swap rates = break cost
The break cost is calculated by multiplying these three values together, resulting in an amount of $23,232.48.
Note: This is a simplified calculation, and actual costs may vary based on lender-specific methods and any present value adjustments. Always refer to your loan contract for precise details.
In Australia, most lenders typically don’t offer fixed-rate loans for more than five years. If interest rates have risen since you fixed your loan, you might not incur break costs for ending your fixed-rate agreement early. This is because the bank could profit from your early repayment. However, some banks may still try to charge fees, so it’s important to ask how the fee is calculated and check the changes in wholesale market interest rates.
Are The Banks Ripping Us Off?
Possibly!
The banks don’t make their current costs of funds public so it’s difficult to be sure that they are accurately calculating the break fees they charge clients. We’ve received reports that some banks are purposely manipulating the break fees that are charged. They do this by using the difference between the rate that you have fixed at and their current wholesale rate, rather than the wholesale rate when your loan was advanced and the current wholesale rate. By doing, they can get away with charging you additional break fees without you knowing about it.
If you’re worried that your bank is trying to rip you off, make a formal complaint and ask them to explain in detail how they are calculating their early repayment adjustment calculator works.
Should I Refinance Anyway?
In most cases, it’s the same cost to refinance your mortgage and pay the break fees as it is to continue paying a higher rate until the end of the fixed-rate term.
For example, if you fixed your loan at 9.00%, you have one year left on your fixed rate, and banks are currently offering rates of 6.00% then paying a break fee may make you reconsider refinancing.
However, if you’re paying a higher rate for the next year, when you do the maths, it usually means that over the next year you pay the same amount in additional interest as you’d have paid in a break fee!
For this reason, it normally makes sense to refinance or sell your property if you need to do so but it doesn’t make sense to refinance if you’re just trying to save money.
Please call us on 1300 889 743 or complete our free assessment form if you’d like to talk to one of our mortgage brokers about refinancing your fixed-rate loan.
Example Of Break Cost Calculation
Let’s say that John has a fixed rate loan of $300,000 with ABC Bank.
He fixed his rate at 6.00% for 5 years but after 3 years, he sells his property and repays his fixed-rate loan in full.
If wholesale interest rates had dropped by 1%, how much would John pay in break fees?
Break fee = Loan amount x Remaining fixed term x Change in cost of funds
Break fee = $300,000 x 2 years x 1%
Break fee = $6,000 approximately
IMPORTANT: This is an example only. You should refer to your lender for exact break fees. As a general rule, if you had a 6% fixed rate and the lender is now offering 5% fixed rates for the same term, then it’s likely that wholesale rates have dropped by 1%. This is not always accurate.
Avoid Break Costs With A Flexible Fixed-Rate Loan
Did you know that some loan types allow you to make unlimited additional repayments with a fixed rate, without penalty?
As long as you don’t close your loan, you can use a flexible fixed rate to enjoy the extra repayments of a variable interest rate without the uncertainty of interest rate fluctuations.
Please call us on 1300 889 743 or complete our free assessment form to talk to one of our mortgage brokers who can offer you practical advice.