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How to avoid early repayment fees when repaying a home loan

Careful planning before you take out your home loan can help you avoid any early repayments fees in the future.

Updated

Fact checked

Early repayment fees for variable rate home loans were phased out as part of government reforms. But while new variable rate loans entered into after 1 July 2011 won't come with early repayment fees, fixed rate loans and variable rate home loans entered into before this time will. Read on to learn more about how you can avoid these fees.

How to repay your home loan sooner

Paying off your home loan faster than planned will save you money in interest, not to mention freeing up the cash that would have gone to your monthly payments. Since most people do not just come into thousands of extra dollars all of a sudden you have to find ways to fit early repayments into your budget. Luckily, there are ways to do this that are easy to do even when your income does not change.

  • Have your salary direct credited. Ask your lender how to have your salary direct credited. This will reduce your loan amount considerably over time. You can use a credit card to pay your other expenses and then have the payment direct debited from the loan account.
  • Make payments fortnightly. By doing this instead of only paying monthly you will make an extra payment each year (there are 26 fortnights in a year, meaning you in effect make 13 monthly repayments instead of the regular 12), saving thousands of dollars by the time your loan is paid off.
  • Pay more than the minimum. This is an easy way to pay off more of your home loan by paying a few extra dollars each month when you make a repayment. You will be surprised at how quickly it adds up.

What is better? Fortnightly vs Monthly Home Loan Repayments?

What fees are payable when I repay my home loan early?

  • Exit Fees. Exit fees can go by different names, including discharge fees and are charged on both variable and fixed home loans when your loan is closed. These can range from $150 - $350.
  • Early termination fees. Early termination fees also go by different names depending on your lender, but they are all costs you will be responsible for if you pay your variable rate or fixed rate home loan off early. As mentioned above, these fees were regularly charged on variable rate home loans prior to the 1 July 2011 ban if you left the loan within three to five years of opening it. For fixed rate home loans, break costs are still usually charged when you leave your home loan before the fixed rate term ends. Although exit fees are now banned on variable rate home loans, if you entered into a loan a short time before the ban was introduced, you might still be required to pay these fees, as some lenders will charge them if you try to leave within three to five years.

About information in our guide to breaking a fixed loan contract

When can you be charged early termination fees?

One of the most common reasons people are charged early termination fees is when they move their loan to a new bank. Usually the switch is done to take advantage of lower interest rates. You must be careful to make sure that your savings in interest is enough to cover the early termination fees that you will be charged in this situation. You can use our switching costs calculator to help work out the savings from moving from one loan to another.

Getting a big promotion or raise is another reason for early repayment of a loan. You may be able to make higher payments which pays down the debt early, saving on overall interest. Again, you have to do all of the calculations to make sure the savings are worth the added cost of early termination fees. It may be smarter to invest the extra money instead of paying the loan off sooner depending on the amount your bank charges in fees.

Maybe you received an inheritance or come across a lump sum of money which you use to pay out your loan. You will save money on interest, but ensure that the savings balances out the cost of your fees.

Again, coming into money from the sale of a business may allow you to pay off your loan early. This situation is unique because while you will be charged early termination fees you could save on interest and perhaps on taxes because you have reinvested the money you profited from the sale. This requires you to do the math, possibly with the help of an accountant to make sure you are saving money in the long term.

If you borrow money interest free to pay off your loan early, all you have to do is make sure the savings offsets the interest. But, if the money you borrow has to be paid back with interest you have to consider that cost when you choose to do an early termination of your loan.

If you consistently make extra payments on your loan whenever you have extra cash your loan will be paid off early. These extra payments affect your bottom line in a positive way, but if they allow you to pay your loan off before the five year mark you will also be charged early termination fees.

Fixed rate break costs vs early repayment fees

These fees are only charged on fixed rate loans. They are the amount you will owe the bank if you pay your loan before the term ends. These fees are calculated by comparing the interest rate you locked your loan in at and the current market rate. Then the length of time that is left on the loan is compared to the initial amount that was borrowed.

For example, you have a loan of $200,000 at a rate of 6% for five years and decide to sell the property and then pay off the full amount. If interest rates drop 2% you would take the loan amount multiplied by the time left on your term multiplied by the change in the interest rate.

Fee = $200,000 x 2 years x 2% (change in loan rate) = $800

Other fees can vary and might include discharge fees. These are on top of the previously mentioned charges.

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. The amount of these fees depends on the amount of time you have left on your loan.

How to avoid early termination fees on your home loan

As mentioned above, it's difficult to avoid a fixed rate break fee. These are usually calculated to make sure your lender won't lose out on you leaving your loan early. But the good news is that after the exit fee ban in 2011 you're more likely to receive a waiver or fee reduction when leaving a variable rate home loan which still has an early repayment fee.

Information on the banking reform website states that lenders are more likely to waive these early repayment fees in the "spirit of competition". Even if your lender doesn't initially waive these fees, it's a great idea to ask, as you might be able to use your loyalty and cite the ban to get out of paying the fee.

Switching home loans

The purpose of switching your home loan is to get lower rates or added features on your mortgage. Once you have purchased a home you should always be on the lookout for better rates, because the savings can be quite significant if you can find better deals. Interest rates constantly change, so what you thought was a great rate when you first took out your loan may be higher than what the current market, at any given time allows. The process of switching your home loan is fairly simple. You research and find the rates and terms that you want. Be sure to calculate what your current home loan costs and the features it offers and compare it to the same calculations on a new loan. Then communicate with several different lenders, including the one who holds your current loan, to find the best deal.

Refinancing with your current lender

If you are planning to switch your loan you will have to make sure that the cost of switching, including fees, is worth the amount you are saving by switching or paying your loan early. In addition there will also be start up fees that can consist of application and set up fees. These fees alone can reach the $2000 mark, so be sure to include them in your switching budget.

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Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
ME Flexible Home Loan Fixed - 2 Year Fixed Rate LVR <= 80% (Owner Occupier, P&I)
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ANZ Breakfree Package Home Loan - 2 Year Fixed (Owner Occupier, P&I)
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Pay no ongoing fees and lock in your rate for 3 years to organise your budget. Eligible new home buyers with low deposits can apply for the First Home Loan Deposit Scheme with this lender and avoid LMI costs.
IMB Fixed Rate Home Loan - 2 Year Fixed (LVR 90% Owner Occupier, P&I, NSW and ACT borrowers only)
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Newcastle Permanent Building Society  Premium Plus Package Fixed Rate - 1 Year Fixed (Owner Occupier, P&I)
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Suncorp Home Package Plus Fixed - 2 Year Fixed Rate Special Offer $150k+ LVR ≤90% (Owner Occupier, P&I)
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UBank UHomeLoan - 1 Year Fixed Rate (Owner Occupier, IO)
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A one year fixed rate offer with no ongoing bank fees.
Well Home Loans Balanced Fixed Home Loan - 3 Year (Owner Occupier, P&I)
2.27%
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IMB Fixed Rate Home Loan - 3 Year Fixed (LVR 90% Owner Occupier, P&I, NSW and ACT borrowers only)
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NSW and ACT customers only. 3 years fixed interest terms and free access to redraw facility online. Available with a 10% deposit.
Newcastle Permanent Building Society Fixed Rate Home Loan - 2 Year Fixed (Owner Occupier, P&I)
2.54%
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$595
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This loan allows you to make up to $25,000 in extra repayments during your fixed rate term.
ME Flexible Home Loan Fixed with Members Package - 2 Year Fixed Rate LVR <= 80% (Owner Occupier, P&I)
2.49%
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Lock in a competitive rate for owner occupiers for two years. Comes with a 100% offset account.
UBank UHomeLoan - 3 Year Fixed Rate (Owner Occupier, IO)
2.44%
2.94%
$395
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A competitive 3 year fixed rate with no ongoing bank fees.
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6 Responses

  1. Default Gravatar
    AmyOctober 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 Customer Care
      MarcOctober 10, 2013Staff

      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.

  2. 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 Customer Care
      ShirleyOctober 7, 2013Staff

      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

  3. 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 Customer Care
      ShirleyJune 18, 2013Staff

      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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