A guide to the costs and fees associated with breaking a fixed rate home loan contract.
A fixed rate home loan is a legal contract guaranteeing that you'll repay a fixed amount of interest on a loan for a specified time period.
If you decide to break that contract by switching, your existing lender must be compensated for any loss they incur. Breaking a home loan during a fixed interest period can be expensive, which is why it's always worth getting a quote from your lender before breaking a fixed interest rate home loan.
It's worth thinking sensibly about the flexibility you'll need in the future with your home loan before locking in a fixed interest rate to avoid having to pay break costs.
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What is considered "breaking" a fixed home loan?
- Switching to a different product
- Extra home loan repayments in excess of an accepted tolerance
- Repaying the loan in full before the end of the fixed rate period
- When a loan is in default, requiring it to be repaid immediately
What fees do I have to pay?
There are two fees to pay when you break a fixed home loan:
- Early repayment adjustment/Break fee/Early exit fee (the expensive one)
- A discharge fee/early repayment fee (usually a couple of hundred dollars)
Early repayment costs can also be known as
- Early repayment penalties
- Early repayment economic costs
- Early repayment interest adjustments
- Break costs or break fees
How is the early repayment cost calculated?
Lenders will typically finance your home loan on the wholesale market with a fixed maturity date. At the time you switch loans or repay your loan early, the bank will use the Bank Bill Swap Rate (BBSR) or BBSW to calculate your early repayment cost. Current BBSRs are displayed on the homepage of the Australian Financial Markets Association and the ASX website.
The BBSR is the interest rate charged on wholesale fixed rate borrowings for banks. It is a floating market, so rates change daily, if not by the minute. They use this measure because it is the most transparent indicator of the cost of funding for your loan.
Lenders compare the BBSR when you originally entered the loan and compare it with the BBSR at the time you break. As BBSRs use specific time periods, such as a three year maturity BBSR, an early repayment cost will be calculated against a BBSR of the same time period that you have left on your loan. So if you have one year left on your fixed home loan, your original BBSR will be calculated against the one year BBSR on the day you break.
*This diagram is an example only.
So, if you decide to break a three-year fixed loan at the start of the third year, your lender will compare the original market swap rate with one-year market swaps (as that is the period remaining on the loan). If the current BBSR is less than at the time of fixing, the customer will have to pay the difference on the amount that was agreed to be paid for the remaining term – as your lender has an obligation to keep up their repayments on their wholesale funding for your loan. They have an agreement to pay their wholesale lenders a fixed amount – whether those lenders are on the market or an internal lending arm. These charges compensate for the estimated cost in lost interest and administration time.
Break cost case studies
Breaking a fixed loan isn't always a situation where large break payments result.
One quick indicator is the home loan market. If all the interest rates currently on the market are more expensive than your current fixed rate home loans, the chances are that your lender will gladly let you off without any repayment penalty – as they can make more money out of your exit.
Check out the two very different scenarios below to see when you might be facing a huge repayment penalty, versus when breaking your fixed rate home loan might be worthwhile.
Fixed interest loan basic early repayment adjustment scenario 1
Outcome: large early repayment cost
Loan details
| Loan amount | $400,000 |
| Loan length | 25 years |
| Fixed period | 3 years |
| Repayment type | interest-only |
| Repaid when? | May 2013 (2 years into a 3 year fixed period) |
| Interest rate of loan | 8.7% p.a. |
| 1 Year of repayments remaining | $25,072 |
Early repayment cost calculation
| 3 Year BBSR (May 2011) | 7.59% p.a. |
| 3 Year fixed interest rate (May 2011) | 8.80% p.a. |
| 1 Year BBSR (May 2013) | 2.65% p.a. |
| Difference between original BBSR and BBSR at break | 4.94% p.a. |
| Difference/original BBSR (4.94/7.59*100) | 65.1% |
| 1 Year of repayments remaining | $25,072 |
| Early repayment adjustment (65.1%x $25,072) | $16,318 |
| Less inflation adjustment (at 2.5% p.a.) | $408 |
| Plus exit fee | $400 |
| Total early repayment adjustment | $15,510 |
In the above example, a borrower has broken a three-year, interest-only home loan at the start of the final year. The borrower has to pay the large 65% difference in the interest rate that was agreed to be paid in the final year. So, the borrower must pay $15,510 in early break costs including fees.
Fixed interest loan basic early repayment adjustment scenario 2
Outcome: no early repayment cost
Loan details
| Loan | $400,000 |
| Loan length | 25 years |
| Years fixed | 5 |
| Repayment type | interest-only |
| Repaid when? | Feb 2011 (4 years into a 5 year fixed period) |
| Interest rate | 7.5% p.a. |
| Original Market Swap Rate (MSR) | 6.39% p.a. |
| MSR in February 2011 | 6.59% p.a. |
| Difference between original and 2011 MSR | -0.2% p.a. |
| Market interest rate 5 year fixed interest loan February 2011 | 8.80% p.a. |
| Early repayment adjustment | $0 |
| Plus exit fee | $400 |
| Total early repayment adjustment | $400 |
This scenario is a 5 year fixed home loan which began in February 2009. It is likely in this case that no early repayment cost will be charged to the borrower.
Why? The original market swap rate is 0.2% p.a. less than at the time the borrower broke the fixed loan. The lender can earn more money on the market now than the original loan agreement.
So by breaking this fixed home loan, the borrower is freeing their lender to make more money by taking advantage of higher lending interest rates on the market at the time the customer broke the loan.
Essentially the lender can use the original wholesale funding agreement to lend money to new home loan borrowers at a higher interest rate than they were receiving under the original agreement.
Compare your refinancing options
If you are thinking about breaking a fixed home loan, your first step is to contact your lender and request a quote for breaking your loan inclusive of the early repayment cost. Then compare the interest costs of a potential new loan, this could be a variable or fixed rate loan option.
Check out some of the latest refinancing options below to find out more:
Refinancing home loans comparison
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Is there any other way we can get away with breaking fee? If we get a total new loan from other bank and pay off the old one, would that still be classified as breaking the fixed rate?
Hi Maddy,
Thanks for your enquiry.
You’ve come through to finder.com.au which is an online comparison service so please keep in mind that we do not offer home loans ourselves.
It would be best that you speak with your lender directly to discuss their treatment of break costs for a fixed rate loan.
Thanks,
Belinda
Hi
I have a similar issue as Mick with Westpac.
They have charged me a large break fee due to a movement in the wholesale interest rate (BBSR), which I don’t understand as the fixed rate I was on was 4.99% and the current rate they advertise is 4.94%.
I would have imagined that the BBSR would move in line with the rates offered to retail?
In any case, I need to find the BBSR for 18/10/13 and cannot find it anywhere… Are you able to help?
Hi Ryan,
Thanks for your question.
Please get in touch with AFMA directly to request historical BBSW rates that date back further than 10 days. These are not published on their website and please note a fee may be involved.
Cheers,
Shirley
Many Thanks Shirley but i am really struggling to find historical data for the specific days i mentioned in my earlier message. Any other options.
Many Thanks
Hi Mick,
I’ve responded to you through email, please check your inbox.
Cheers,
Shirley
Hi,
I was charged a penalty for breaking my fixed rate with CBA. When i have questioned the figures (swap rates) that were used to calculate this figure the CBA are unable to give me these stating they are computer generated. I find this unbelievable how can i be charged a penalty but they cant give me the figures used to do this. I want the swap rate figures used so i can calculate the penalty myself using their formula. I have been passed from dept to dept without success.
I have tried to find the swap rates myself but am finding it very difficult to access these. Are you able to inform me where i can get historical swap rate figures for 27/06/2013 (start of my fixed rate) and 05/12/2014 (when i broke the fixed rate). The fixed rate was for a three year period.
Many Thanks
Hi Mick,
Thanks for your question.
You can find past data regarding the BBSW on this page.
I hope this helps,
Shirley
Is selling your home and paying out a fixed term loan classified as an early repayment of the loan.
Hi Sylvia,
Thanks for your question.
Unfortunately it is classified as an early repayment of the loan, as you’re repaying the full amount before the fixed term.
If you’d like to know what fees are involved, please get in touch with your lender.
Cheers,
Shirley
Are the banks required to commit to a quote? I was quoted a nil repayment fee to break my fixed loan and signed the return form but then a week later received a call saying a mistake had been made and the break cost was now 4k. After much discussion they informed me that their legal advice was they were in the right even though we had accepted the original quote.
Hi Robert,
Thanks for your question.
Banks are required to adhere to a certain Code of Ethics. It might be helpful to get a second opinion from a lawyer, or the Financial Ombudsman Service.
Cheers,
Shirley
Hello,
RE: your Case Study 1 above, it seems that if the borrower is up for $25,072 of payments remaining if he stuck with the remainder of the fixed loan vs early termination fees of $15,510, then there’s still a $9,562 benefit to breaking the loan now? Especially if he’s come into a cash windfall & just wants to get rid of the debt.
Am I right or have I missed something?
Thanks, Mike.
Hi Mike,
Thanks for your question.
This depends on the situation; the purpose of the case study was to highlight the fees involved if you decided to break a 3-year fixed loan with $25,072 remaining during the fixed loan period. You would be hit with a $15,510 fee, which is still less than the outstanding principal (for the fixed period) but you will have to decide whether paying this fee outweighs the benefits of switching or changing the nature of the home loan.
You will also need to take into account your remaining principal and there could more fees involved.
Cheers,
Shirley
We have a situation, we are a de facto couple, the husband has 1 x fixed rate loan with credit union for an investment property. Then a second fixed rate loan which was only changed from a standard fixed rate loan so that we may make more payment on it.
We want to sell the house we are living in and buy a new one. At first the Credit Union said we could just borrow more money, but he is the only one who can borrow more money because the loan is only in his name not joint names which restricts out loan capacity. the deed is only in his name. Can you help
Hi Anne,
Thanks for your question.
You may want to consult a mortgage broker to help you a find a loan for your situation.
Cheers,
Shirley
Hi…
I have a mortage of $250,000…on a fixed rate of 8.2 ….how much might it cost to exit to a variable rate ?…
Thanks
Hi Fleur,
thanks for the question.
This will depend on a number of factors. We’ve written a great page which talks about how fixed rate break costs are worked out. Another great way to find out is to simply ask for a quote from your existing lender.
I hope this helps,
Marc.
Considering an early repayment on our home loan and am ready to do the calculation…can’t seem to find the whole swap rate for previous years/months and need the 2 year rate for April 2013. Can you find out what it was?…approx. is good enough so I can work out a rough figure.
Hi Lindylou,
thanks for the question.
I’d recommend asking your lender about these figures, as they’ll be the ones to work out whether or not you’d be liable to pay break costs.
Sorry I couldn’t be of more help,
Marc.