The exact cost to break a fixed rate mortgage varies from lender to lender and there is no standard easy way to calculate how much you may be charged. You’ll have to ask your particular lender for a quote on exactly how much they’ll charge you for mortgage break costs. However, in general terms, the size of your break costs will depend on:
- the size of your loan
- the remaining time of your fixed loan period
- the difference between the current wholesale interest rate (which is the ‘standard’ interest rate set by the Reserve Bank of Australia, also known as the Bank Bill Swap Rate), and the fixed rate you originally agreed to
There may also be a discharge fee on your mortgage, which can be anywhere from $200 to $650, so break fees aren’t the only consideration.
Remaining with your existing lender is cheaper
If you’re staying with your existing lender, but refinancing to a different type of loan with a better interest rate or additional features, you may only be charged a switching fee, which can range from $200 to $700.
However, if you choose to close your fixed loan early and refinance with another lender, your costs will increase and may include additional costs such as discharge, settlement and title exchange fees.
Break cost calculations explained
- A $300,000 loan is fixed for three years at a 3.45% p.a. interest rate. However, when wholesale interest rates are lowered to 2.23%, the borrower wants to refinance their loan (after 18 months of their original three-year fixed term).
In this case, the break costs would be calculated as follows:
Break cost = initial loan amount x interest rate differential x remaining term in years
The interest rate differential, in this case, is the difference between 3.45% p.a. (your original fixed interest rate) and 2.23% p.a. (the wholesale interest rate on the day your break cost is calculated), which is 1.22% p.a. This is converted to a decimal number for this calculation (0.0122). Therefore, the estimated break cost for this loan would be:
$300,000 x 0.0122 x 1.5 = $5,490
You can see by this example that break costs can be substantial. The amount of time remaining on the fixed loan has a strong influence on the size of the mortgage break cost.