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Fixed Rate Home Loan Break Costs

Refinancing your fixed rate home loan can often involve break costs. Find out all you need to know about loan exit fees

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, updated on August 8th, 2023       

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Loan exit fees for variable interest rate loans may have been banned by the Australian Government back in 2011, but borrowers are still charged break fees (also known as early exit fees) if they refinance their mortgage and break the terms of a fixed rate loan.

Find out more about fixed rate mortgage break costs and why it may sometimes be worthwhile paying them here with Savvy. Comparing loans and lenders with us can help you find another loan with a far lower interest rate to make a mortgage switch worthwhile.

What are fixed rate home loan break costs?

Break costs (also known as ‘early exit fees’) are charged by lenders on fixed rate loans when the borrower wants to end a fixed loan period prematurely.  They’re designed to compensate the lender for any loss that arises as a result of the borrower’s decision to break their fixed term contract.

Why do lenders charge break fees?

When you agree to a fixed rate loan for a fixed period, your lender has to acquire those loan funds from someone else (a bank or business) and pay interest to them.  The interest your lender has to pay for that money is based on the rate you agree to on your loan. 

If you break that agreement and switch to a home loan with a lower interest rate, the lender charges you a break fee to compensate them for the difference between the lower interest rate you pay – and the higher one they still have to pay, because they don’t have the option of paying their loan source a lower rate.

How do I calculate fixed loan break costs?

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.

How can I reduce the early exit fees on my fixed loan?

Try to wait for as long as you can before refinancing to reduce the time aspect of your break cost calculation.  Here’s an example of how the time remaining on a fixed loan term affects the size of the break costs.

As we can see from this chart, if you break your three-year loan halfway through its term, your break fees would be a hefty $5,490, but if you wait another six months to a year, they’ll decrease significantly. 

You’ll have to weigh up this cost reduction against the potential savings gained from reducing your interest rate.

Size of loan Original fixed term loan period Interest rate differential Loan term remaining when refinancing Cost of break fee
$300,000
3 years
1.22% p.a.
1.5 years
$5,490
$300,000
3 years
1.22% p.a.
1 year
$3,660
$300,000
3 years
1.22% p.a.
6 months
$1,830

Of course, reducing your home loan interest rate is not the only reason for wanting to break a fixed rate home loan.  Your life circumstances may have changed (you may have changed marital or employment status or suffered financial hardship) or received a boost to your available funds and wish to pay off your loan early.  Alternatively, you may wish to access the equity in your home, which you can use for a variety of different purposes, including purchasing an investment property, funding renovations or consolidating debt.

Pros and cons of switching from a fixed to a variable loan

PROS

Get a lower interest rate

If interest rates have fallen since you fixed your home loan, switching to a variable loan may save you thousands in interest over the life of the loan.  Even a small reduction in the annual interest rate (from 3.2% p.a. to 2.9% p.a., for instance) can make a substantial difference to how much interest you’ll pay over the years, often in the tens of thousands of dollars.  The larger your loan, the greater the potential savings you can achieve.

Choose a new loan term

Your financial circumstances may have changed since you fixed your loan, and a new job or a pay rise means you can now afford to pay off your loan more quickly. Switching home loans to reduce the term of your loan (such as from 30 years to 25 years) can shave tens of thousands off the cost of your mortgage.

Gain additional features

More savings are to be had if you break your fixed home loan to take on a variable rate loan with additional features such as the ability to make lump sum repayments, or an added offset account or redraw facility.  These additional features, as well as giving you more flexibility, can help you substantially reduce the cost of your loan overall.

CONS

Early exit fees can be substantial

As we’ve seen in the examples above, the cost to break a fixed home loan can be substantial and can also include further costs in addition to early exit fees, such as loan discharge, conveyancing or other legal fees.  It can be complex to work out how much you’ll save by switching, as there are so many variables in the calculation.

Less certainty when budgeting

A fixed loan gives you certainty, as you’ll know exactly how much your mortgage repayments will be throughout the term of the fixed loan.  Swapping to a variable rate loan means your repayments will vary, even from month to month if the Reserve Bank makes frequent changes to the underlying interest rate.

Interest rates may rise

You may be comfortable with your fixed loan repayments now, but what happens if you swap to a variable rate loan and interest rates rise substantially?  Home loan interest rates in decades gone by have reached more than 15% p.a., so if you switch to a variable rate loan from a fixed loan, make sure you can still make loan repayments even if interest rates rise by several percentage points.

More of your frequently asked questions about fixed rate home loan break costs

Is there any way to avoid break costs on fixed rate home loans?

Not really – you can ask your lender if they’re prepared to waive or reduce break costs, particularly if you’re staying with them, but that’s at their discretion.

Do I need to consult a solicitor if I'm thinking of breaking my fixed rate loan?

No – switching home loans or refinancing is an everyday occurrence in Australia, so it’s not necessary to seek legal advice. However, it’s always advisable to seek financial advice before making major loan refinancing decisions.

Is it worth breaking my honeymoon rate period early?

Probably not – because honeymoon interest rates are generally well below standard fixed interest rates, so it would be hard to find a lower rate to benefit you.  However, if your loan is set to revert to a higher interest rate at its conclusion, it’s often a good decision to begin looking around for better loans to switch to immediately after.

Can I claim fixed rate loan exit fees as a tax deduction?

If you have an investment property, you’re entitled to claim fees related to the loan attached to your investment property (not your home loan), so there’s a high chance that loan break fees are tax-deductible too, but you should seek advice from your accountant or financial advisor specific to your situation.

Does breaking a fixed rate loan negatively affect my credit rating?

No – paying off a loan earlier than expected will not negatively affect your credit rating, and may even improve it, as it shows lenders that you’re a responsible borrower who pays debts on time or even before they’re due.

Will my lender offer me another loan if I break a fixed rate contract with them once?

Yes – you’ll still be eligible for home loans with a lender that you’ve broken a fixed term home loan contract with.  They don’t take such actions personally and are most concerned with retaining your business as a borrower.

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