Understanding home loan break fees
If you’re thinking about breaking the fixed term of your home loan, whether it's to pay out your loan for any reason, or to vary your loan, you’ll have to pay certain fees, specifically break costs.
What are break costs?
Break costs refer to fees charged by the lender when you end your fixed rate home loan before the fixed loan term is up. If you repay your loan before the fixed rate period ends or if you switch to another loan type (i.e., from fixed rate to variable rate) before the end of the fixed rate period, you’ll likely be charged break costs.
When you borrow money from a lender at a fixed interest rate, they obtain the money from the market at a wholesale interest rate with the same term as your home loan. Unlike the borrower, the lender doesn’t have the option to pay that off early.
The break fees are used by lenders to pass on potential losses incurred when you end the fixed rate home loan earlier than agreed upon. Break costs can also be referred to as early repayment fees or fixed-rate early termination fees, depending on the situation and the lender.
If you have a variable rate home loan, you can usually avoid break costs. Break fees typically refer only to fixed rate home loans. If you pay off your variable rate home loan earlier or refinance it, you may only be charged discharge fees or exit fees.
It’s best to consult with your lender to see the terms and conditions of your specific loan.
Other ways you can incur break costs
Aside from paying off your fixed rate home loan early or switching loans, you can incur break fees by doing one of the following:
- Make payments that are more than what’s stated in the loan agreement.
- Sell your property within the fixed-rate term and pay out the loan early.
- You are in default, and the owed amount on your loan becomes immediately due for payment.
How are break costs calculated?
The formula lenders use to calculate break costs is complex and unique depending on the lender. Factors that are generally taken into consideration include your loan balance, current interest rates vs rates at the time your loan entered the fixed rate term, as well as wholesale rate movements during your fixed term, amongst various other factors.
A very basic example of a break cost calculation could be:
Break Cost = (Loan Balance Owed) * (Home Loan Interest Rate – Latest Average Interest Rate) * (Remaining Fixed Period)
For example:
You have a loan balance of $300,000 with a fixed rate of 5.00% p.a. for 5 years, which is repaid after 2 years. The time remaining for your fixed rate term locked in is 3 years, and the current new lending fixed rate is 4.00% p.a.
- Break Cost fee = $300,000 * (5.00%-4.00%) * 3 years
- Break Cost fee = $300,000 * (1.00%) * 3 years
- Break Cost fee = Approximately $9,000
Can I make additional payments without incurring break costs?
Often, lenders offer a prepayment threshold where borrowers can make extra payments on their loans without paying break costs or early payment fees. The amount differs based on the lender’s policies and the conditions of your loan.
At loans.com.au, you can make additional payments of up to $10,000 per year on your fixed rate home loan. With free extra payments, you can save more over the life of the loan as you pay less interest in total. If you want to see how additional repayments affect your home loan, try out our handy online home loan calculator.
If you’d like to learn more about fixed rate home loans, get in touch with us by calling 13 10 90!
Disclaimer: The information provided in this article is general in nature and does not constitute financial or legal advice. Please seek professional advice tailored to your circumstances before making any financial decisions.
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About the article
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