What is a Break Cost?

What is a Break Cost?

Information about Fixed Rate Loans

With a fixed rate loan you can lock in an interest rate for up to 5 years, which gives you the certainty and peace of mind of knowing exactly how much your repayments will be in the future. So whether interest rates go up or down, your repayments will stay the same for the entire fixed period of your loan.

But things can change in life and there may be circumstances when you need to break the fixed rate period of your loan. When this happens a Break Cost may apply.

This guide will help you understand when a break cost could apply and how it’s calculated.

What is a Break Cost?

A Break Cost is an interest adjustment that you might be charged if you make an early repayment to your fixed rate loan in whole or in part.

When could I be charged a Break Cost?

Things can change and circumstances may mean you need to break the fixed rate period of your loan.

You could do so by:

- Making a lump sum payment on your fixed rate loan except where an Annual Early Repayment Threshold applies*
- Paying out your fixed rate loan prior to the fixed rate period expiry date
- Switching to another home loan product including one with a lower interest rate

If you choose to break the fixed rate period of your loan, the Bank may incur a loss as a result. If that’s the case, you could be charged a Break Cost to recoup that lost revenue.

For example, if you take out a fixed rate home loan with us over 5 years, but you decide to pay out your loan after 3 years, we may need to charge you a Break Cost to recover any revenue that we lose as a result.

* The Annual Early Repayment Threshold is the amount of $10,000 in each 12 month period starting from the day your Fixed Rate Period commences on a Your Way Plus Home Loan. If you make repayments that exceed the Annual Early Repayment Threshold, we will endeavour to return amounts in excess of the Annual Early Repayment Threshold. If we are unable to do so, you may be subject to payment of a break fee.

For more information, please see Clauses 3A and 3B of our Consumer Lending terms and conditions and the Fees and charges brochure. Please note “Break Cost” are referred to as a “Break Fee” in these brochures.

Why do you charge a Break Cost?

When we lend you money for a fixed rate loan, we factor in that we’ll be receiving interest at a fixed rate, based on a specific loan amount, over an agreed period of time.

If you make an early repayment on your fixed rate loan, we charge a Break Cost to recoup any lost revenue as a result of the wholesale interest rate being lower at the time of your early repayment than it was at the start of the fixed rate period of your loan.

We don’t profit from charging a Break Cost, we only recover any losses that we incur if you need to break the fixed rate term of your loan.

How do you calculate my Break Cost?

If your circumstances change and you need to break the fixed rate period of your loan, any Break Cost we charge will be based on a number of factors including current interest rates, your outstanding loan balance and how long you have remaining on the fixed rate period of your loan.

The Break Cost is calculated as follows:

Loan amount being repaid early XRemaining term of the fixed rate periodXDifference in Wholesale Interest Rates=Your Break Cost*

*This amount is then reduced to adjust for the present day value.

Calculation example

Katie borrows $300,000 for her first home and takes out a loan with a 3 year fixed interest period. Katie pays off her Home Loan after just 1 year, leaving 2 years remaining on the loan’s original fixed term.

On the date Katie’s original loan was fixed, the 3 year wholesale interest rate was 2.15% p.a. When Katie repaid her fixed rate loan (with 2 years remaining of the original 3 year term), the 2 year wholesale interest rate was 0.73% p.a.

The difference between the wholesale interest rates on the date Katie’s fixed rate loan was first fixed and the date that Katie paid out her fixed rate loan 2 years early, is called the interest rate differential.

Katie’s Interest rate differential: 2.15% - 0.73% = 1.42%

Based on this interest rate differential, Katie’s approximate Break Cost would be: $300,000 x 1.42% x 2 = $8,520

Katie’s Break Cost would then be reduced to provide a present value as at the date of the early repayment of the fixed rate loan.

Why do Break Costs (on the same loan) vary when calculated on different days?

Because Break Costs are based on a number of variable factors, Break Cost quotes can vary when one or more of those variables have changed. For example, your outstanding loan amount, the remaining fixed rate term on your loan or the wholesale interest rate on the day the fixed rate term is broken.

Wholesale rates change daily, and the changes can be significant especially if wholesale interest rates drop.

Your Break Cost quote is valid for 7 calendar days from the day it is calculated.

What should I consider before breaking my fixed rate loan?

Before you decide to go ahead and break your fixed rate loan, there are some important things to consider to make sure it’s the best option for you and your circumstances.

Breaking the fixed period on your current loan for a lower advertised interest rate can seem like an appealing option. However, the financial impacts of any Break Cost you incur as a result can be really significant and may mean that you’re worse off overall. It’s important to weigh up any potential interest savings that a lower interest loan might offer against the Break Cost you could be charged if you break your fixed term loan early.

Before you decide to break your fixed rate loan, we recommend:

  • Talking through your options with a Lending Specialist and;
  • Seeking independent financial advice

How do I pay the Break Cost?

The Break Cost must be paid prior to the expiry date of your Break Cost quote using funds from your Everyday Direct account. If you are selling or refinancing, the Break Cost will be factored into the payout figure at settlement.

How do I request a quote for a Break Cost?

If your circumstances change and you think you may need to pay out your fixed rate loan early, switch loans or make a lump sum payment on your loan, you should request a Break Cost quote from us.

To request a quote, simply call us on 1800 864 864 and we’ll calculate your Break Cost and email you a quote that will be valid for 7 calendar days.