How much does it cost to break my fixed interest rate home loan early (switch or pay out)?
If you pay out your fixed rate home loan early then you may need to pay the fixed rate break costs to the bank or lender. This can be very expensive, in the thousands of dollars and is the main reason that reduces the flexibility of fixed rate home loans. Before taking out a fixed rate home loan you should consider if you may want or need to repay it, refinance it or switch it to a variable interest rate before the fixed term has finished. If it is likely that you will want to do any of these it may be cheaper to use a variable interest rate home loan instead (due to the fixed interest rate break costs).
What are the other names for a fixed rate home loan break fee?
Break fees are also known by other names by the different banks and lenders some common names for a fixed rate home loan break fee include:
Australia and New Zealand Bank: Early repayment fee;
Bankwest: Break costs;
Commonwealth Bank: Early repayment adjustment;
ING Direct: Break costs;
Macquarie Bank: Break costs;
National Australia Bank: Prepayment fees and economic cost;
Rams: Fixed rate early termination fee or fixed rate unwind adjustment;
St George Bank: Break costs;
Suncorp: Early payment interest adjustment; and
Westpac: Break costs.
Will I always have to pay a break fee if I pay out my fixed rate home loan early?
No, you will not always have to pay fixed rate break costs. It will depend on the changes in wholesale lending rates. If the rates change in favour of the bank or lender you will not have to pay a fixed rate break fee.
What is are fixed rate break costs, early repayment fees, early termination fees, unwind adjustment or switch fees?
Fixed rate break costs are what your bank or other lender will charge you if you:
- Switch to a different product
- Repay the loan in full before the end of the fixed rate term
- Make extra home loan repayments in excess of the allowable limit
- Default on the loan, requiring it to be repaid immediately
Why am I be charged a fixed rate break fee or switch fee?
The Fixed rate break costs covers any loss that the bank or lender has from you breaking your fixed rate loan.
When you take out a fixed rate home loan, the lender may borrow the money it lends to you from the wholesale money market using the Bank Bill Swap rate for the same term that you fix the rate for. For example if you have a 5 year fixed interest home loan, then the bank will borrow money over 5 years with a fixed rate also.
If you repay your fixed interest rate home loan (switching to a variable rate or refinancing to another lender is effectively the same) then the bank will calculate how much it will cost them to repay your loan contract at your fixed rate and your remaining term. If the fixed rates that the bank can borrow on the wholesale market have gone down then the bank will make a loss, so they charge you a break fee equal to that loss. This is because they will not be able to on lend the money that you borrowed elsewhere if the market is lending money with lower payments.
How is are fixed interest rate beak cost fees calculated?
Fixed interest rate break cost fees are calculated by the difference in the interbank Bank Bill swap rate at the time that you took out your fixed rate home loan and the interbank swap rate (to borrow for the same time as your remaining fixed term) when you pay out your loan.
For example if the swap rate for a 5 year fixed loan was 10% when you took out your fixed rate home loan. Then after 3 years you want to pay out your loan and at that time the fixed rate for the remaining period of your loan (2 years) is 6%, then it will cost you 4% of you remaining loan balance for each of the remaining years.
If your loan at the start was $110,000 and after 3 years you has $100,000 remaining then the cost of the fixed rate break fee would be:
$100,000 x 4% x 2 years = $8,000 break cost fee.
I am paying a higher fixed interest rate, should I refinance to a variable rate?
In most instances the break cost when switching to a variable interest rate home loan will cost the about same amount as paying the higher fixed interest. So if you need pay a break fee to refinance to a cheaper variable rate the cost is likely to be similar. If you want to refinance to change your loan structure it may be worth it. If you are trying to save money by refinancing to a cheaper variable rate all of the cost of your existing fixed rate loan and your proposed new loan should be considered. If you need help to see if it is worth it please contact us.
What if the bank makes a profit from me paying out my fixed rate home loan, do I get paid?
No, you will not get paid the profit. The bank will keep the profit.
What if I just want to make some extra repayments on my fixed rate home loan?
Some loans allow you to make extra repayments within a limit. If you repay more than the limit you may be charged and extra for the amount over the limit.
What about the Government ban of break fees?
The Australian Government made a ban on all variable mortgage early repayment fees, exit fees or break fees for mortgages taken out on or after the 1st of July 2011. This ban does not apply to fixed rate home loan early repayment adjustment fees
Even variable rate home loans can have a small mortgage discharge fee which covers the cost of removing the registered mortgage from the title of your property.
Want to talk to a mortgage broker about refinancing your home loan?