A break cost is a fee that represents the lender’s loss if you repay a fixed rate home loan early or switch loan product, interest rate or payment type during a fixed rate period. This fee is commonly used by lenders to pass on the actual loss incurred when a customer switches or prepays a fixed rate loan.
December 2021 – 13 minute read
When a bank or financial institution lends you money at a fixed interest rate, they obtain money from the money market at wholesale interest rates, based on you making your payments as agreed until the end of the fixed rate period. If you don’t, and wholesale interest rates change, the lender can make a loss.
The wholesale interest rate is commercially sensitive and not displayed publicly. When money is lent at a fixed rate for a fixed term, a lender (bank or financial institution) borrows money from the wholesale money market using a Bank Bill Swap Rate (BBSR), locking in the BBSR at the time they lock in the borrower’s interest rate. There’s no way to predict what the wholesale interest rate will be, and it changes frequently, subject to market conditions. Movement in a lender’s Variable or Fixed rates doesn’t normally form part of the calculation used to establish if a break cost is applicable.
At Westpac, we use the term break cost when referring to the fee associated with prepaying over the threshold or switching during a fixed rate period. With other lenders the following terms can also mean the same thing:
There are two main scenarios where break costs will be charged:
This fee applies when you:
Will apply when you:
If you find yourself in default and the total amount owing becomes immediately due for repayment, break costs could apply if the break is combined with a change in wholesale market interest rates during a fixed rate period.
It’s the maximum amount your lender has specified you can pay as extra repayments into your loan account over the fixed period without triggering a prepayment break cost. At Westpac, the prepayment threshold on fixed rate loans is a maximum of $30,000 over the fixed period.
First year
Customer prepays $26,000 and redraws $12,000
They don’t exceed the threshold
Second year
Then prepays $8,000 after 1 year and 6 months
They don’t exceed the threshold as the net prepayment is $22,000
Third year
Then prepays $10,000 after 2 years and 6 months
They exceed the threshold as the net prepayments is $32,000
Sometimes lenders will also charge an administration fee on top of break fees. Westpac does not charge administration fees.
Our break costs formula is complex. This is a simplified description.
To calculate the amount of break costs, we multiply the difference in wholesale interest rates with the remaining term in your fixed rate period and the loan account balance (if you are prepaying the full loan balance) or any amounts you have prepaid as at each remaining loan repayment date. The amount is then converted to its value in today’s dollars.
It is the difference in rates on the day a prepayment or switch is made, where the wholesale interest rate applicable for your remaining fixed rate term is less than the wholesale interest rate applicable when you began your fixed rate period.
Depending on whether you are paying out your loan in full or making additional repayments above the payment threshold, before the end of the fixed rate period, will determine how you'll be charged. At Westpac, the methods of charging customers are as follows:
Paying out in full before the end of the fixed rate period Break cost fee will appear as a separate fee in the final payout figure.
Additional repayments above the accepted prepayment threshold
Break fees will automatically be charged to the home loan account.
A break cost calculator estimates the break costs that could be charged on a fixed rate home loan if a borrower were to make a prepayment (ie. repay ahead of the due date or pay an extra or higher amount above the prepayment threshold) or make a change to another interest rate or product, or another repayment type, that will change the lenders funding position.
Some lenders provide break cost calculators for customers to estimate their break costs. At Westpac, we don’t do that as these ‘do-it-yourself’ calculations can be misleading and provide inaccurate information. Instead, we provide break cost quotes prepared by our specialist home loan team and do not charge additional administration fees for these quotes.
You’ll need to contact your lender to provide you with a break cost quote. They will be able to confirm if break fees are applicable on your current fixed rate home loan.
Westpac customers can request a break cost quote by calling 8am-8pm, 7 days a week (Sydney time): 132 558 or you can request a callback.
As wholesale interest rates can change daily, break cost quotes are valid only for a fixed period. At Westpac, our quotes are valid for 5 business days from the day they are calculated. If you decide to proceed with breaking your fixed rate home loan, your request needs to be submitted within the 5 business days for the quote to be honoured.
If, like at Westpac, the break cost quote is only valid for 5 business days:
Example 1:
Break cost is calculated on a Monday the request must be lodged by close of business on Friday of that same week.
Example 2:
Break cost is calculated on a Wednesday the request must be lodged by close of business on Tuesday of the following week.
In most cases, if you’re breaking a fixed interest period on your home loan before the end of the fixed term, break costs will apply. Your lender will be able to tell you how much you’ll need to pay. However, you should check with your lender if any loan features exist that you may be able to use to avoid paying them.
Portability or substitution of security, as it is sometimes known, is a loan feature offered by some lenders that enables you to substitute the security you have on your loan for another form. Security on a home loan in most cases is a property, so when you port a loan, you are substituting the property securing the loan for another property. This is particularly handy when buying and selling a property when you'll need a loan on your new purchase as it means you don’t need to close out or discharge your loan when you sell and then reapply for a new loan when you buy. In some cases, you’ll also be able to apply for a loan increase before you port your loan.
There are two ways that you can use portability as a loan feature when buying and selling property:
This is when you’re buying and selling at the same time, meaning the settlement date for the property you are selling and the settlement date for the property you are buying are aligned.
With a deferred settlement, the settlement dates of the property you are selling and the property you are buying are not aligned. In this case, the gap between the settlement dates can last up to 6 months (conditions apply), which means in the interim a term deposit will need to be set up to be used as security against the loan.
Here are some other options to consider to avoid break costs:
If you’ve extra funds that you’d like to use to reduce your mortgage put the maximum you can which reaches your prepayment threshold into your home loan, but then you might consider placing the rest into an interest-bearing account like a Term Deposit. Once your fixed rate period expires you can then add the extra funds into your loan account without penalty. You could then refix your loan or even consider splitting your home loan if you foresee future cash sums that could exceed your prepayment threshold.
Some lenders will allow the removal of the name of one of the borrowers in the situation of separation or divorce without the need to pay break costs, but the remaining customer(s) must be able to service the loan. At Westpac, we have a ‘removal of name’ process where a borrower can be removed from the loan without breaking your fixed rate period, and therefore avoiding the fee.
If you’re thinking of refinancing a fixed rate home loan when it’s still in a fixed rate term, you need to do your homework and look at both sides of the coin. It’s a good idea to make sure before you even think of refinancing that you take a good look at your current loan and the new loan you are thinking of refinancing to. Factors that you may wish to consider:
Interest rate
Loan period
Repayment type
Fees and charges
What features does your loan offer and are you using them to your best advantage?
Interest rate
Loan period
Repayment type
Fees and charges
You never know when you might need to use a loan feature. The nature of unexpected events is that they are unpredictable, and you don’t know when they will happen. Having the flexibility to call upon loan features that come standard could be the difference between keeping and losing your home. Make sure you understand the loan features.
At Westpac, we’re here to help in any way we can. If your loan is not meeting your current needs, all it could take is just a 15-minute conversation to turn that around.
Simply give us a call 8am-8pm, 7 days a week (Sydney time): 132 558 or request a callback.
When refinancing to another lender you have to take into consideration not only the differences between the loans but also the costs, in both time and money. It’s always a good idea to seek independent financial advice to ensure the lending criteria, other credit products, disclosure documents and entire loan package meet your personal objectives.
By refinancing, you could be hit with:
It can be a real hassle to refinance:
Simply give us a call 8am-8pm, 7 days a week (Sydney time): 132 558 or request a callback and we’ll get back in touch within 2 business days.
Credit criteria, fees and charges apply.
This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice.