Break Fees

A break fee is the cost your lender charges if you exit a fixed-rate mortgage before the agreed term expires. When you fix your interest rate, your bank essentially locks in funding at a wholesale rate to match your term. If you break the loan early, the bank may be left holding a funding arrangement it can no longer deploy at the rate it expected, and it passes some or all of that cost on to you.

The size of a break fee depends on several factors: how much remains on the fixed term, the size of your loan, and crucially, the difference between your fixed rate and current wholesale rates. If rates have risen since you fixed, your break fee may be zero or minimal, because the bank can re-lend the money at a higher rate. If rates have fallen significantly, your break fee can be very large, sometimes tens of thousands of dollars.

Common reasons people break a fixed term include selling the property, refinancing to a better rate, making a large lump-sum repayment, or restructuring the loan. It is always worth requesting a break fee estimate from your lender before making any decision. In some cases, the cost savings from moving to a better rate will outweigh the break fee. In others, it is better to wait out the remaining term.

Break fees are a direct financial cost that must be weighed against any benefit from breaking the loan. A significant break fee can negate months or even years of interest savings from moving to a lower rate. If you are considering selling your home before your fixed term ends, factor the likely break fee into your net proceeds calculation. Some borrowers structure loans with shorter fixed terms specifically to minimise potential break fee exposure.

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