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Understanding how fixed rate break costs work

If any part of your current loan is fixed and if you’d like to change or refinance your loan you may incur what is called fixed rate break costs. The cost may vary between lenders and are often not too easy to calculate. For borrowers with a fixed rate loan, here is everything you need to know about break costs:


What are ‘break costs’?

Break costs exist to cover the lender in the event that a borrower breaks their fixed rate home loan. The fees are an estimate of the loss that a lender incurs as a result of the loan break. In the event of refinancing (switching your loan product or moving to a new lender) break costs may only apply if the variable rate is lower than the fixed rate product.

What is ‘breaking’ a fixed loan?

  1. The loan is refinanced to a new product or lender
  2. If the loan is repaid in full before the end of the loan term
  3. When additional home loan repayments beyond the agreed amounts are made
  4. The loan is in default (a repayment is missed)

How to calculate break costs

Calculating break costs can be quite complex, it’s best to ask your lender directly what to expect in the event of a break.

Sarah purchases a home with a $500,000 loan from the Suncorp bank. The loan is fixed at 5% for 5 years and she makes interest only repayments. After 3 years, Sarah decides to refinance the property as she wasn’t happy with the bank. The variable rate at the time was 4%, a difference of 1% from her fixed rate.

Break cost = (loan amount outstanding) x (wholesale rate change) x (term remaining on loan)

Break cost = ($500,000) x (1%) x (2)

Break Cost = $10,000

Please note that all lenders will calculate break costs differently. This is an example intended for explanation purpose only.

If you have any questions or are uncertain about what break costs you may be best speak with your bank or mortgage broker.

For an honest and unbiased opinion, talk to Think and Grow Finance today on 03 8390 5855 or email