Break fees, or "Early Repayment Adjustments", are costs to the borrower often charged if a loan is repaid or adjusted before the end of an agreed fixed term.
This fee is designed to compensate the lender for the potential loss of interest they would have earned had the mortgage continued as originally agreed.
They commonly come up if you're considering refinancing, selling your home, or paying off your mortgage early, so understanding break fees can save you from unexpected costs.
Why do lenders charge break fees?
When you lock in a fixed-rate mortgage, the bank or lending institution is essentially making a bet on interest rates.
They're agreeing to lend you money at a certain rate, anticipating a certain return over the life of the loan.
If you break that contract early, the lender might lose out, especially if market interest rates have dropped since you took out your loan.
How much will I pay to break my loan?
This depends on a lot of things, but it's helpful to understand how they're calculated.
It can be a bit complex and varies from one lender to another. But generally, the bank takes into account:
The amount of your loan that's still outstanding
The amount of time left on your fixed term
The difference between your fixed rate and the current market rate
The lender's administrative costs
Break fees are calculated daily (as that's how often swap rates can change), so we usually approach the bank to confirm these costs as close as possible to the date you'd like to break your loan.
We also have a nifty little tool, which in a falling interest rate market allows you to compare the cost of breaking your loan with the upside of taking a new rate - check that out here
Is it worth breaking?
In short - talk to us about how to minimise the costs of breaking your loan.
If you're selling and purchasing, we may be able to negotiate with the bank to reduce the cost, or approach another lender for some incentive to move across to a product that suits you better.
And if you'd like to pay off a lump sum, often the cost of breaking is still less than the interest you would otherwise have paid.
We're always here to help if you're not sure - book a call with one of us to chat through the specifics of your situation and minimize the impact of any break fees.