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Early repayment fees on home loans

Exiting a fixed rate loan early can cost you more in break fees, but most variable rate loans don't have early repayment fees anymore.

Some lenders have a discharge fee whenever a borrower pays off their home loan. This fee applies whether you've repaid the loan on time or early. But if you have a fixed rate home loan, exiting the loan early also comes with break costs.

If your home loan has a variable rate, you may be charged with an early repayment fee. But this only applies on older home loan contracts because the Australian Securities and Investments Commission (ASIC) ended this fee in 2011.

The difference between discharge, early repayment and break fees

The early repayment fee situation is a little confusing. First, let's look at the possible fees lenders may charge and which borrowers each fee applies to.

  • Discharge fees. Also called exit fees, discharge fees apply to both fixed and variable rate loans. Looking at Finder's database, this fee costs on average $300-$350. Keep in mind that some lenders don't have discharge fees at all, so it's worth looking at this when comparing your home loan options.
  • Early repayment fees. These fees used to apply to variable rate home loans. In 2011, ASIC banned the practice for new loans. This means any variable rate loans entered into after 1 July 2011 won't come with early repayment fees. If your loan is older than this, a fee may apply.
  • Fixed rate break fees. A fixed rate break fee is only charged on fixed rate loans. They are the amount you will owe the bank if you pay your loan before the term ends. The exact fee depends on the loan amount, time remaining on your loan contract and current interest rates, but as a guide, it can be anything from a few hundred dollars to tens of thousands of dollars.

Based on the facts above, the most expensive scenario for repaying a loan early is a fixed rate home loan. Other borrowers may face no fee at all, or a single $350 discharge fee. Borrowers on older variable rate loans may have to pay an early repayment fee.

Understanding a fixed rate break fee

Here's a quick example. You borrowed $500,000 and fixed your rate at 3.00% for the first 4 years. But after 2 years, you sell the property and repay the loan in full. Your lender charges you a break fee based on its current interest rate for the same fixed loan, which has fallen by 100 basis points (1.00%) from 3.00% to 2.00%.

Here's the formula:

Fee = $500,000 x 2 years x 1% (change in loan rate) = $10,000

Early termination fees are charged when the bank has costs they need to cover due to you paying your loan out early. The bank has also borrowed money in order to provide your loan. When you pay early they lose out on the interest they expected, a portion of which would have gone to the payment of their loan. This is why they charge early termination fees.

How to avoid early termination fees on your home loan

If you do have an older variable rate loan then your lender can charge an early repayment fee. But there's nothing stopping you from asking your lender to waive the fee, given that these fees have been banned for a decade now and you've been a loyal customer.

Whether your lender agrees or not, it never hurts to ask.

Fees when switching home loans

The purpose of switching to a new home loan is to get a lower rate or find a home loan that is more suitable for your needs. When looking at refinancing, be sure to look at both the fees from the new loan (like an application fee) and the costs of exiting the old one. Check if your current lender charges an exit fee. If you are eligible to pay an early repayment fee, ask if the lender can waive it.

If you're on a fixed rate loan, your lender will provide a detailed calculation of the break costs. If the cost is not too high, it might still be worth switching if the new loan saves you a lot of money.

Refinancing with your current lender

Image: Shutterstock

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6 Responses

    Default Gravatar
    ahcoburnOctober 9, 2013

    Researching information in preparation for home loans. Would you please advise for each of the institutions what is the specific requirement at time of application – not just the usual checklist. e.g. employment specifications either permanent / casual. Look forward to your reply.

      AvatarFinder
      MarcOctober 10, 2013Finder

      Hello ahcoburn,
      thanks for the question.

      The specific requirements for a loan are not something lenders openly disclose. Beyond the usual checklist they each have unique criteria which they use to evaluate whether or not a potential borrower should be approved.

      I hope this helps,
      Marc.

    Default Gravatar
    tinaOctober 6, 2013

    Hi. I am selling my property and due to complete sometime in mid October, my last instalment of my fixed term is due on 28th October, my fixed term ends officially 31st October, should I pay an early repayment charge

      AvatarFinder
      ShirleyOctober 7, 2013Finder

      Hi Tina,

      Thanks for your comment.

      You may have to pay an early repayment fee if you’re not porting your loan with you, please ask your lender to confirm.

      Hope this helps,
      Shirley

    Default Gravatar
    melissaJune 18, 2013

    I have a fixed rate of 7.790% for five years till 27 April 2016. I owe $35,067.34 based on our current repayments it will take 9yrs and 8 mths to pay off the loan. I have accumulated $35,156.00 in extra payments by previously making extra payments . Due a change in circumstances I had to reduce my payments to the minimum amounts.
    My question is would it be worth refinancing for a lower rate for such a small amount and how much can I pay in extra payments to get the loan paid off.

      AvatarFinder
      ShirleyJune 18, 2013Finder

      Hi Melissa,

      Thanks for your comment.

      Please have a look at our refinancing guide to help you determine this. You also may want to call your current lender to explain your situation as they may be able to help as well.

      Cheers,
      Shirley

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