Early repayment fees on home loans, just when you thought it was over

Excited to pay off your home loan? Run the numbers first

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By

Richard Whitten

&

Sarah Megginson

Updated

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Key takeaways

  • Fixed rate home loans often incur substantial break fees if repaid early sometimes tens of thousands.
  • Older variable rate home loans may have early repayment fees but ask your lender to waive them.
  • Always compare all potential fees including discharge and break costs against new loan savings before refinancing.

What is an early repayment fee?

Very simply, an early repayment fee is where you pay off the loan before your loan term ends and the lender charges you for it. It is different to an exit fee or a discharge fee, which can be charged at the end of a loan, but apply even when you pay the loan off on time.

Early repayment fees were typical of variable rate home loans up until 1 July 2011, when the Australian Securities and Investments Commission (ASIC) ended the practice. If you have a home loan from before that time, you may still be expected to pay an early repayment fee if you pay off the loan early.

Today, variable rate home loans come with the flexibility of being able to make unlimited extra repayments and paying off the loan early.

However, fixed rate home loans have less flexibility and you will usually need to pay a fee if you repay early.

The difference between discharge, early repayment and break fees

These are all fees that could be charged at the end of your loan:

  • 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. Covers the lenders costs if you pay off your loan before the loan term ends. Any variable rate loans entered into after 1 July 2011 won't come with early repayment fees.
  • 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 6.00% 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 on offer for the same fixed loan, which has fallen by 100 basis points (1.00%) from 6.00% to 5.00%.

Here's the formula:

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

Why do banks charge early repayment fees?

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 repayment 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 more than 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

Richard Whitten's headshot
Senior Money Editor

Richard Whitten is Finder’s Senior Money Editor, with over eight years of experience in home loans, property, credit cards and personal finance. His insights appear in top media outlets like Yahoo Finance, Money Magazine, and the Herald Sun, and he frequently offers expert commentary on television and radio, helping Australians navigate mortgages and property ownership. Richard started his career in education and textbook publishing in South Korea. He holds multiple industry certifications, including a Certificate IV in Mortgage Broking (RG 206) and Tier 1 and Tier 2 certifications (RG 146), as well as a Bachelor of Education from the University of Sydney and a Graduate Certificate in Communications from Deakin University. See full bio

Richard's expertise
Richard has written 779 Finder guides across topics including:
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Money expert + media spokesperson

Sarah is the author of How to Raise Rich Kids. With over 20 years of experience in property, finance and investment journalism, she is a trusted expert whose insights regularly appear across television, radio and print media, including Sunrise, Channel 7 News, Bloomberg and Yahoo! Finance. She has previously served as managing editor for Your Investment Property and Australian Broker. Her expert advice has been shared in the media over 4,000 times. Sarah holds a Bachelor’s degree in Communications and a Tier 1 Generic Knowledge certification, which complies with ASIC standards. See full bio

Sarah's expertise
Sarah has written 242 Finder guides across topics including:
  • Home loans
  • Personal finance
  • Budgeting and money-saving tips
  • Managing the cost of living
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6 Responses

    ahcoburn's avatar
    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.

      Marc Terrano's headshotFinder
      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.

    tina's avatar
    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

      Shirley Liu's headshotFinder
      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

    melissa's avatar
    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.

      Shirley's headshotFinder
      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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