Paying off a fixed-rate home loan early can save you interest—but it may also trigger break fees, which vary by lender. Understanding how break costs are calculated, your options to avoid them, and strategic decisions like refinancing or using loan portability is key to saving money. This guide, written by an expert mortgage broker, will give you worked examples, a decision framework, and expert tips for navigating break costs with confidence.
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 by paying it off early or changing it.
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 its wholesale money-market loan early. So, 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?
When you have to pay break fees, it depends 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.
Before making any changes to your fixed-rate home loan, it is worth speaking to an expert mortgage broker.
How Do You Calculate Break Costs?
Every bank has a different way of calculating break fees. However, 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! This formula is just a guideline; 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.
Worked Example: How Break Costs Are Calculated
Paying off a fixed-rate home loan early can trigger break fees. Let’s break down a practical example so you can see exactly how these costs are calculated.
Scenario
- Loan amount: $800,000
- Fixed-rate term remaining: 3 years
Difference in cost of funds: 1.5%
Step 1: Apply the Formula
The general formula is:
Break cost = Loan amount × Term remaining × Difference in cost of funds
Plugging in our numbers:
Break cost = 800,000 × 3 × 0.015 = 36,000
Result: Paying off this fixed-rate loan early would cost $36,000 in break fees.
Step 2: Visualising the Calculation
To make it easier to follow, imagine the process in four simple steps:
- Identify your remaining loan balance.
- Check your remaining fixed-term (in years).
- Determine the difference between your bank’s fixed rate and the current wholesale funding rate.
- Multiply these numbers to estimate your break cost.
Step 3: How Loan Size & Remaining Term Affect Break Costs
- Higher loan amount: $1,200,000 loan × 3 years × 1.5% = $54,000
- Longer remaining term: $800,000 loan × 5 years × 1.5% = $60,000
- Smaller loan / shorter term: $400,000 loan × 1 year × 1.5% = $6,000
Decision Framework: Should You Break Your Fixed Rate?
As we mentioned, not all borrowers benefit from paying off a fixed-rate home loan early. Breaking your fixed term can sometimes save money, but it can also come with significant costs. This framework will help you decide whether breaking your fixed rate makes sense for you.
Scenario Modelling: Early Repayment vs Staying (With Numbers)
Assumptions:
- Loan: $800,000
- Fixed term remaining: 3 years
- Current fixed rate: 5%
- Refinance rate if breaking: 4%
- Break cost: $36,000
Option 1 – Break and Refinance
- Interest cost at new rate (4%) for 3 years:
- Interest per year = $800,000 × 4% = $32,000
- Total interest over 3 years = $32,000 × 3 = $96,000
- Add break cost: $96,000 + $36,000 = $132,000 total cost
Option 2 – Stay in Current Fixed Rate
- Interest cost at current rate (5%) for 3 years:
- Interest per year = $800,000 × 5% = $40,000
- Total interest over 3 years = $40,000 × 3 = $120,000
- No break cost → $120,000 total cost
Comparison
- Option 1 (break + refinance): $132,000
- Option 2 (stay fixed): $120,000
- Net difference: $12,000 more spent if you break the fixed rate
Conclusion: Staying in the current fixed-rate loan is the better financial choice in this scenario.
Questions to Ask Your Mortgage Broker
Before deciding whether or not to break, make sure to ask:
- What is my current loan balance?
- How much term remains on my fixed-rate period?
- What is the difference between my fixed rate and current wholesale funding rates?
- Does my lender offer loan portability or security substitution to avoid break fees?
- Are there any caps on extra repayments or other restrictions?
Key Takeaways
- Break costs can easily outweigh savings from refinancing.
- Always run a scenario with exact numbers for your loan balance, interest rates, and remaining term.
- A mortgage broker can help identify portability or other features that could reduce or eliminate break fees.
Book a free assessment with us to find out if fixing is right for you.
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, 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 | Max Extra Repayments | Name |
CBA | Commonwealth Bank Fixed Rate Wealth Package Home Loan | Up to $10,000 per year | |
NAB | NAB Choice Package Fixed Rate Home Loan | $20,000 during your entire fixed rate period | |
Westpac | Fixed Options Home Loan | increase your regular repayments by up to 20% above the minimum repayment | |
ANZ | ANZ Fixed Interest Rate (with Breakfree Package) | Lower of $5,000 per year, or 5% of the original loan amount | |
Fixed Rate Home Loan – Owner Occupied | $30,000 during the fixed period | ||
Suncorp Fixed Rate Home Loan in Home Package Plus | $500 in addition to your monthly repayment | ||
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 November 2024. 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. Remember 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 will 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.
BONUS: What To Do When Your Fixed Rate Period Ends
Do I have to do anything when a fixed-rate term ends? Typically, once the fixed rate ends, the loan will move to a variable rate. So if you’re locked in and the end of your 24 months is up, you’ll move to a variable rate next month. So there’s nothing you need to do—you will not be refixed; the bank will just revert it to a variable rate.
For example, if your original loan was set up over 30 years, and after 2 years, the fixed rate ends, you’ve got another 28 years left on the loan at a variable rate.
Can I extend my fixed-rate mortgage?
Let’s say you are one year into the two-year fixture; can you extend your fixed-rate mortgage to 3 years? So typically, once you’ve fixed in, you cannot extend that term because you’ve agreed terms with the bank. If you extend it, you’re breaking your fixed rate, which can cause you thousands of dollars. So, if you’re currently fixed a lot of times, it might make sense to see that term out and get the maximum benefit of that fixed rate period.
Break Costs FAQs
How long is a break cost quote valid?
Break cost quotes are usually valid for 5 business days. You must submit your request within this period to lock in the quoted fee and avoid unexpected changes.
What is loan portability and how can it help me avoid break fees?
Loan portability allows you to transfer your fixed-rate loan to a new property without paying break fees, as long as you meet your lender’s conditions. This is a useful option if you are selling and buying simultaneously.
What’s the difference between break fees and exit/discharge fees?
Break fees apply when you repay or switch a fixed-rate loan early. Exit or discharge fees are charged when closing any home loan, regardless of loan type. Understanding the difference helps avoid surprises when refinancing or moving.
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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