Understanding how fixed rate break costs work.
The consequence of breaking a fixed rate home loan comes in the form of ‘break costs.’ These may vary between lenders and are often confusing to calculate. For borrowers with a fixed rate loan, here is everything you need to know about break costs, what they are and how they can be calculated.
What are ‘break costs’?
Break costs exist to cover the lender in the event that a borrower breaks their fixed rate home loan. The fees are an estimate of the loss that a lender incurs as a result of the loan break. In the event of refinancing (switching your loan product or moving to a new lender) break costs may only apply if the variable rate is lower than the fixed rate product.
What is ‘breaking’ a fixed loan?
- When additional home loan repayments beyond the agreed amounts are made
- The loan is in default (a repayment is missed)
- The loan is refinanced to a new product or lender
- If the loan is repaid in full before the end of the loan term
How to calculate break costs
Calculating break costs can be quite complex, it’s best to ask your lender directly what to expect in the event of a break.
Joan purchases a home with a $500,000 loan from the the bank. The loan is fixed rate of 4.5% for 5 years and she makes interest only repayments. After 3 years, Joan decides to sell the property and repay her outstanding loan amount in full. The variable rate at the time of sale is 3%, a difference of 1.5% from her fixed rate.
Break cost = (loan amount outstanding) x (wholesale rate change) x (term remaining on loan)
Break cost = ($500,000) x (1.5%) x (2)
Break Cost = $15,000
Keep in mind that all lenders will calculate break costs differently. This is an example intended for explanation purposes only.
If you have any questions or are uncertain about what break costs you may be subject to speak with your bank directly. For any disputes regarding break costs visit the Financial Ombudsman Service Australia’s Fact Sheet.
Do you want to determine if it’s right to break your fixed rate home loan in order to save money to refinance? It’s always good to get double check to make sure you’re saving as much you can on your home loan. Call us on 1300 307 155 or make a free enquiry here to see how much SwitchMyLoan can save you on your home loan today!