Fixed loan break cost – how much does it cost to end a fixed loan contract?

If you want to end your fixed rate mortgage early, you'll pay a break fee. Find out how much it could cost you to break a fixed rate home loan.

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A fixed loan break cost calculator could help those who are selling a property or refinancing work out what kind of fee they'll be charged. Unfortunately, this calculator can't exist because a fixed rate break cost is always personalised and based on the specific details of your loan, such as:

  • Total loan term
  • Loan length remaining on your fixed loan contract
  • Total value of the loan
  • The interest rate that you fixed
  • Current fixed interest rates on offer from that lender

However, we can help you understand how banks' calculate your break fee, to give you an indication of what you may pay. A fixed rate home loan is a legal contract that guarantees you'll repay a fixed amount of interest on a loan for a specified time period, meaning, if you take out a three-year fixed rate loan at 2.29% on April 1 2021, you pledge to make repayments based on that interest rate until March 31, 2024.

If you decide to break that contract by switching loans or lenders before the fixed period has ended, your existing lender will want to be compensated for any financial loss they incur. Breaking a home loan during a fixed interest period can be expensive, which is why you should ask your lender how much it will cost you to break your fixed interest rate home loan before you decide to do it.

If you're considering getting a fixed rate home loan but you're concerned about flexibility, you might want to consider a variable mortgage instead.

See how much you can save with a lower rate

What is considered "breaking" a fixed home loan?

  • Switching to a different home loan product with the same bank or lender
  • Switching to a different home loan with a different bank or lender by refinancing
  • Making extra home loan repayments in excess of an accepted amount
  • Repaying the loan in full before the end of the fixed rate period (due to selling the property or refinancing)
  • When your loan falls into serious 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:

  1. Early repayment adjustment/Break fee/Early exit fee (the expensive one)
  2. 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 Bank Bill Swap Rate

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.

How early repayment costs are calculated

*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 example calculations

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 length25 years
Fixed period3 years
Repayment typeinterest-only
Repaid when?May 2013 (2 years into a 3 year fixed period)
Interest rate of loan8.7% p.a.
1 Year of repayments remaining$34,800

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 break4.94% p.a.
Difference/original BBSR (4.94/7.59*100)65.1%
1 Year of repayments remaining$34,800
Early repayment adjustment (65.1%x $34,800)$22,645
Plus exit fee$400
Total early repayment adjustment$23,054

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 $23,054 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 length25 years
Years fixed5
Repayment typeinterest-only
Repaid when?Feb 2011 (4 years into a 5 year fixed period)
Interest rate7.5% p.a.
Original Market Swap Rate (MSR)6.39% p.a.
MSR in February 20116.59% p.a.
Difference between original and 2011 MSR-0.2% p.a.
Market interest rate 5 year fixed interest loan February 20118.80% 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.

You should also weigh the pros and cons of fixed and variable rates when making your decision to switch.

Compare how much you'll save by switching to a lower rate

$
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HSBC Home Value Loan P&IHome≥ 30% Deposit

HSBC Home Value Loan
1.97%
1.98%
  • App: $0
  • Ongoing: $0 p.a.
$554
$3,288 refinance cashback offer
This competitive variable rate loan is available for borrowers with 30% deposits. Eligible refinancers borrowing $250,000 or more can get a $3,288 cashback. Terms and conditions apply.

loans.com.au Smart Booster Discount Variable Home Loan P&IHome≥ 20% Deposit

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$545
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Macquarie Bank Basic Home Loan P&IHome≥ 40% Deposit

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2.14%
2.14%
  • App: $0
  • Ongoing: $0 p.a.
$567
Apply for the Macquarie Bank Basic Home Loan - LVR ≤ 60% (Owner Occupier, P&I) and get a low variable interest rate, plus no application and ongoing fees. Requires a 40% deposit.
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27 Responses

    Default Gravatar
    MaddyJune 12, 2015

    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?

      Default Gravatar
      BelindaJune 15, 2015

      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

    Default Gravatar
    RyanJanuary 15, 2015

    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?

      Avatarfinder Customer Care
      ShirleyJanuary 15, 2015Staff

      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

    Default Gravatar
    mickJanuary 14, 2015

    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

      Avatarfinder Customer Care
      ShirleyJanuary 14, 2015Staff

      Hi Mick,

      I’ve responded to you through email, please check your inbox.

      Cheers,
      Shirley

    Default Gravatar
    mickJanuary 13, 2015

    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

      Avatarfinder Customer Care
      ShirleyJanuary 13, 2015Staff

      Hi Mick,

      Thanks for your question.

      You can find past data regarding the BBSW on AFMR webpage.

      I hope this helps,
      Shirley

    Default Gravatar
    SylviaOctober 14, 2014

    Is selling your home and paying out a fixed term loan classified as an early repayment of the loan.

      Avatarfinder Customer Care
      ShirleyOctober 14, 2014Staff

      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

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