How to calculate breaking your fixed rate home loan

If you’re paying off more than the minimum repayments on your home loan, you may actually incur break costs fees from your bank. Here’s our guide to understanding and – ideally – minimising what you might need to pay with our break cost calculator.

On a variable loan, paying more than your minimum repayments is a good idea; you get the loan paid down quicker and lower the amount of interest you pay. However on a fixed-rate loan, making extra payments – above the limit your lender allows – can be a costly mistake. If you pay a fixed rate home loan off early, your mortgagee is likely to charge you break costs, which can amount to thousands of dollars. Therefore it’s important to understand that fixed rate loans come with a breakage fee, and to carefully consider your options before taking out a fixed term home loan.

What are break costs?

A break cost is a penalty fee to customers who close their fixed rate loans before maturity. Banks charge this because they borrow from the wholesale money markets to fund the loan that they provide you, and do not have the option of paying this off early. By closing your loan before the end of its term, you breach the contract that you set with the lender. As they need to keep servicing their loan without your scheduled payments, they incur costs that they seek compensation for. Before entering a fixed rate loan agreement, it is worth finding out how the lender calculates break costs and what these are likely to amount to. There is always a chance you may need to exit your loan early, so it’s important be informed on this before you enter your loan agreement

Why do you pay break costs?

Your lender uses a Bank Bill Swap Rate (BBSR) to borrow money from a wholesale market to provide your loan. This BBSR does not allow early repayment. If you start making more payments, you throw the BBSR off balance. If the BBSR falls between the time you took out the loan and the date when you paid it off, the bank incurs a cost. The lender will then pass this cost on to you as a break cost. You will incur a break cost if you pay off the fixed rate loan early, or you pay off more than your agreement allows. (Many loan providers will allow you to make some additional payments – this is an attractive loan feature to many). You may also face break costs if you default on the loan and it becomes payable immediately, or if you refinance your loan.

Break cost calculator:

Each bank uses a different formula to work out its break costs, so it’s worth finding out how your lender calculates this fee. Here is a break cost calculator: Break cost = loan x interest rate change x time left on the loan To demonstrate this, imagine a customer has a five-year fixed rate loan of $400,000 paying a 5% interest rate, and decides to sell the property (and pay the loan off) after three years. During the term of the loan, wholesale interest rates reduce by 1%. In this case, the customer will need to repay the final two years of the loan in full, incurring a break cost as interest rates have dropped. Therefore their break cost would amount to: Break Cost = $400,000 x 2% (0.02) x 2 years This results in a break cost of $8,000. Generally the longer the time left on the loan, the higher the penalty fees tend to be. So it’s worth keeping this in mind when choosing a fixed rate loan term.

How can I avoid paying break costs?

If you have a fixed rate home loan, you can’t always avoid break costs; life happens and you may need to refinance your loan or sell your house under unexpected circumstances, which can result in paying off your existing mortgage early. You can, however, manage break costs and be informed. A break cost calculator can help you calculate how much you’ll pay. Some lenders will tell you what their limits are. Speak to the lender to find out more. Also, bear in mind that banks may change their policies. Stay on top of this to make sure you don’t get bitten with a fee you weren’t expecting. Also don’t get caught out by lenders giving other names to their break costs. Any fee that has the phrase ‘early repayment’ attached to it is probably a break cost. A good option may be avoiding fixed rate loans altogether. A variable rate home loan can offer more flexibility. Alternatively, you can take out a flexible fixed rate loan to get the best of both worlds. You may be able to switch and save. More information on breaking up with your fixed rate, here.

When should I pay a break cost?

Sometimes it makes sense to pay a break cost, such as when refinancing your home loan to a lower interest rate or to a product with better features. It may make sense to carry a cost in the short term that will enable you to save more over the long term and pay off your mortgage sooner. Speak to a uno expert broker to find out more and help you figure out a strategy for your particular situation. Book in a quick call with our customer care teamBook a call in with UNO

Book Call Now

UNO home loans

Need help with your home loan?

UNO Brokers are available night and day for a quick review or your situation and bring expertise that will support better decision making that will save you time and money. Book in a quick call when it suits your busy schedule

Get Started

Related Articles

TESTIMONIALS

What our customers are saying

Sally Mackenzie
February 19, 2024
We chose Uno Home Loans from their impressive web site knowing we were going to find it hard, on many fronts, to qualify for a home loan. We were incredibly fortunate to be assigned Mike Parsons as right from the get-go, despite the complexities, he hit the ground running for us. He was incredibly knowledgeable, with years of experience but what was immediately apparent and impressive was that he was totally invested in getting us over the line, doing absolutely everything possible, including working around the clock. Despite it being a relatively small loan in the order of things, Mike never missed a beat, getting docs ready, following up and answering every request from the proposed funder immediately. He kept us informed on progress the minute anything happened, and again if anything needed to be done, he was right on it. In short, we highly recommend Uno, and Mike, knowing what a remarkable job he did, over many weeks, to get us our loan. He got us a great deal, with far better rates than we expected, so we couldn't be happier. In fact, without doubt, you'd be hard pressed to find a more personable, sharp, hard working, dedicated professional who clearly prides himself on getting his customers standout results.
Read more
Rod
February 13, 2024
Scott and his team were just A-mazing. We felt supported through the whole process with the greatest quality and care. Every question answered right in time, or even before we asked. The process was smooth and we got the best outcomes we could have wished for.
Read more
Angela Biddle
February 6, 2024
Our mortgage recently came up for renewal, and with interest rates skyrocketing we were looking for ways to minimise the impact. Michael and his team were proactive and attentive. Michael spent time with us to understand our circumstances. He found mortgage options that worked with our current financial situation and longer investment plans. He presented clear options, providing guidance where needed. He and his team were helpful and responsive - streamlining the process and keeping us updated through the negotiations. In the end, Uno did the heavy lifting and secured a significantly better rate than our current bank offered, all with friendly, personal service. We would highly recommend UNO Home Loans.
Read more
Fotis Bikas
January 15, 2024
I cannot help but congratulate Scott Wilkinson of UNO Home Loans for being an absolute credit to both his company and the entire loans industry. Scott is a truly rare gem of a broker in that he will not only go the extra mile to achieve for each customer the very best deal, but his knowledge of all and sundry within the industry is unsurpassed (you will see what I mean if you speak to him). Additionally, Scott has a clear passion for imparting his wealth of information with each customer, whereas the conversation with most other brokers would simply be over if they could not get you the best deal. For me, Scott Wilkinson of UNO Home Loans stands head and shoulders above the competition and I feel privileged to benefit both from his expertise and professionalism whenever it is time for a refinance or new loan.
Read more
Tomoharu Matsui
January 11, 2024
Michael Parsons helped me a lot when it's difficult to establish my capabilities in loan.
Read more
Gillian Kearon
January 9, 2024
I highly recommend Mike Parsons as a mortgage broker. I couldn't fault the service provided by UNO. Thanks Mike!
Read more
Taner T
December 20, 2023
Thank you Eren Tan for the amazing service and support. Our Loan was a little tricky and complex for other lenders but Eren managed to get it over the line in record time. His professionalism and dedication to our needs was exceptional. If you need a Loan no matter how complex your situation, make sure you contact Eren at UNO Home Loans.
Read more
Karaipu Brown
December 20, 2023
Buying & selling a house at the same time is very stressful but Scott Wilkinson from UNO home loans made sure we knew what was happening & took most of the stress away. He always kept us up to date and if we had a concern or wanted clarification on something we were able to call him, if he didn’t know the answer straight away he will find out and contact us back.. now we are enjoying our new house and turning it into a home :)
Read more
Chris Anderson
December 18, 2023
Just completed my first loan with UNO which was so much easier than with other other brokers I have used in the past. Our broker MIKE PARSONS always had time for me and broke things down for me in the simplest of terms and was very patient with my silly questions and my constant changing of plans. I wish I had used them in the past as I wouldn't be in the situation I'm in now. Can't recommend them highly enough. Thanks UNO and Thanks MIKE 😊
Read more
Stephen Broomfield
December 11, 2023
To be able to recommend Scott Wilkinson for your mortgage broker was a privilege. We had deals fall through but Scott supported, guided and stuck with us, proper partnership. The whole team at UNO helped us and supported us right through to after settlement. Made sure everything was correct and how we are progressing. Communication was amazing and straightforward and easy to understand. Transparent. We can not Recommend Scott and the team as Uno high enough. Use UNO with confidence.
Read more
Tarek Hussain
December 6, 2023
Can't thank Amy enough for her hard work, dedication and determination on getting multiple loans completed for me. I wouldn't hesitate in recommending Amy and the Uno team to any of my associates. Will definitely be back in the near future!
Read more
Linda
November 3, 2023
If you’re looking for a trustworthy, thorough, reliable & knowledgeable Mortgage Broker then you must call Anita Callaghan! I can’t even imagine how stressful this process would’ve been without her. Anita went above and beyond to make sure she answered every question, responded to every text (even on weekends/after hours), and followed up on every detail to ensure we had all the info we needed. Anita is a true people person who is warm, empathetic, kind and supportive. You can tell she loves helping people and loves what she does, which is probably why she’s so good at it! Can’t thank you enough Anita, or recommend you more highly! You’re the best!
Read more