Understanding Break Costs: What Are They? 

Break costs are fees your lender charges when you pay extra on a fixed-rate home loan. Most lenders permit small annual extra payments, but going beyond this or paying off the entire loan triggers break costs. Unfortunately, banks don’t always disclose these fees or how they calculate them. 

Avoiding Break Fees: Can You Do It? 

In most cases, avoiding break fees is tough. Lenders typically impose them if you refinance a fixed-rate loan or sell your house before the term ends. 

Government Rules and Exit Fees: 

Exit fees for variable mortgages were banned after July 1, 2011. However, fixed-rate break costs and discharge fees still apply. If your fixed-term loan began before July 2011, you might face significant exit fees. Discharge fees, around $350 per property, cover the lender’s cost of removing the mortgage from your property title. 

Repaying Without Break Fees: How Much Can You Pay? 

It depends on your lender. Major banks are often strict with extra repayments on fixed-rate home loans. Some building societies offer flexible fixed-rate loans allowing unlimited extra repayments. For example: 

• Commonwealth Bank (CBA): $10,000 per year. 
• National Australia Bank (NAB): $20,000 during the fixed term (some loans have $0 limit). 
• Westpac (WBC): $30,000 during the fixed term. 
• Suncorp: $499.99 per month more than normal monthly repayments. 
• BankWest: $10,000 per year. 
• Specialist fixed-rate lenders: Unlimited repayments and redraw if the loan account isn’t closed. 
• Australia and New Zealand Bank (ANZ): $5,000 per year OR 5% of the original loan amount, whichever is less. 
• St George Bank (SGB/StG): $10,000 per year. 
• Rams: $30,000 during the fixed term. 

What Else Are Break Costs Called? 

Different banks use various terms for break costs, like economic costs, exit fees, early repayment adjustment, or prepayment fees. 

Why Do Banks Charge Break Fees? 

When banks fund fixed-rate loans, they borrow money from wholesale markets using rates like the Bank Bill Swap Rate. If you repay your loan early, the bank faces an “economic cost” until their borrowed money is repaid. This cost, known as break costs, is passed on to you. 

What Triggers Break Fees? 

Refer to your loan terms. Generally, break fees apply if you repay the loan early, sell within the fixed term, exceed allowed repayments, default, or switch to another loan type. 

How Are Break Costs Calculated? 

Exit fees are calculated based on the difference in wholesale rates from loan initiation to repayment. Each lender has a specific formula listed in your loan contract. An example formula is: Break fee = Loan amount x Remaining fixed term x Change in cost of funds. Break costs are higher for longer terms and larger amounts. 

Are Banks Charging Fairly? 

It’s uncertain. Banks don’t disclose their current costs, leading to concerns about accurate break fee calculations. Some banks might manipulate fees. If worried, make a formal complaint and seek detailed explanations. 

Should You Refinance Despite Break Fees? 

In most cases, refinancing and paying break fees are comparable to continuing a higher rate until the fixed term ends. Consider refinancing for specific needs but avoid it solely for saving money. 

Avoiding Break Costs: Flexible Fixed-Rate Loans 

Certain loans allow unlimited extra repayments on a fixed rate without penalty, as long as you keep the loan open. Enjoy variable rate benefits without interest rate uncertainties through a flexible fixed-rate loan.