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Loan Break Fees

Loan break fees or costs are the costs and fees associated with breaking a fixed rate loan contract.

When you enter into a fixed rate loan for your home or investment property, the interest rate that you are charged is calculated based on the lending institution’s prediction of the likely interest rate movements over the course of that term (often 3 to 5 years.)

When you break the term of your contract, the break cost is designed to compensate the financial institution for any loss of profit that has been factored in to the term of the contract.

How are Break Fees calculated?

They are essentially based on three factors:

  1. The loan amount you initially borrowed.
  2. The interest rate you locked into, compared to the prevailing interest rate at the time you wish to end your loan.
  3. The length of time remaining on your fixed-rate term.

What is considered ‘breaking’ a fixed home loan?

  • Repaying the loan in full before the end of the fixed rate period
  • Switching to a different loan product
  • Extra home loan repayments in excess of an accepted tolerance
  • When a loan is in default, requiring it to be repaid immediately

Are there benefits to breaking my fixed rate loan?

Paying a break fee is sometimes worthwhile, if you stand to save more than the fee’s total because your new loan offers a lower interest rate.

Generally speaking, any short-term gain from interest savings may be offset or even outweighed by the break cost.

What if  I’m selling my property?

If you’re selling your home (or investment property) and buying a new one you can often simply transfer the loan, without incurring any break costs.

Can I switch to a lower interest rate if I don’t have the money for the break cost?

It may be possible to add the break cost to your loan, but this could also mean that the total repayments you make over the life of your loan are higher – even with the lower interest rate you’re switching to.

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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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