A break cost is what a lender can charge if you leave a fixed rate loan early, and it can range from nothing to thousands of dollars.
If you live in Hornsby and you are weighing up a fixed rate, a rate lock or a refinance, the question to ask is not only "what is the rate?" It is "what happens if my plans change?" Sell, refinance or pay the loan down faster than the contract allows, and the cost of leaving can outweigh the saving you were chasing.
What Is a Rate Lock-in on a Home Loan?
A rate lock-in holds a fixed interest rate between approval and settlement, often for around 90 days. Terms differ between lenders, so check the details of yours.
The lock protects you if rates rise before settlement. The trade-off is that a fee usually applies, and if rates fall in the meantime you may not get the lower rate. This is different from the fixed term itself, which is the period (often one to five years) where your rate stays put after settlement.
For investors, the lock matters most when you are buying and need certainty on your numbers before settlement. Ask the lender what the fee is, whether it is refundable and what happens if settlement runs late.
Fixed Rate Break Costs: How the Calculation Works
A break cost is based on how far wholesale rates have moved since you fixed, multiplied by your loan balance and the time left on the fixed term. Lenders then usually discount the result to a present value.
A rough guide is: balance x fall in wholesale rates x years remaining. The exact figure can only be worked out on the day you break, because markets move daily.
Two points are worth knowing:
- If wholesale rates have risen since you fixed, the break cost is usually small or nil.
- If rates have fallen and a lot of the term remains, the cost is usually larger.
The lender has locked in funding for your whole term, and a break cost recovers its loss when it re-lends that money. Break costs on regulated home loans must not exceed a reasonable estimate of the lender's actual loss.
Are There Exit Fees on Home Loans?
Exit fees were banned on new home loans from 1 July 2011, but break costs and discharge fees were left in place. So leaving a variable loan usually costs a discharge fee and government registration fees, while leaving a fixed loan early can add a break cost on top.
That is why refinancing from a variable loan is usually a simpler exercise than refinancing from a fixed one. If you are not sure which you are on, a Loan Health Check will show you the rate type, the fixed end date and any exit costs in your contract.
A Hornsby Example: What a Mid-Term Sale Could Cost
Breaking a fixed loan after one year of a three-year term can cost around $10,000 on a $500,000 balance if wholesale rates have fallen by one percentage point. Here is how that looks in practice, using an illustrative rate of 6.75% p.a.
Consider an owner of a Hornsby investment property who fixes a $500,000 loan at 6.75% for three years. After one year, they decide to sell and use the equity elsewhere. Two years remain, and wholesale rates have dropped by one percentage point.
The rough calculation is $500,000 x 1% x 2 years, which is about $10,000 before the present value adjustment. The real figure depends on the lender's method on the day, so it could be lower or higher.
Now consider the same borrower who had split the loan. They fixed $250,000 at 6.75% and kept $250,000 variable, also at an illustrative 6.75%, with an offset account linked to the variable part. On the same rate movement, only the fixed half carries a break cost, which is roughly $5,000. The variable half can be repaid with no break cost.
The outcome is a smaller exit bill and cash parked in the offset account that could still reduce interest while the property was held. The trade-off is that the variable half moves with the market. If rates rise, that portion's repayments rise too, and you give up certainty on half the debt.
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When a Split Loan Makes Sense for Investors
A split loan suits borrowers who want repayment certainty on part of the debt but may sell, refinance or make large extra repayments. It limits the break cost exposure to the fixed portion.
There are costs to weigh. You may get less rate certainty overall, and the variable portion's repayments can rise if rates go up. Splits can also make the loan structure more complex, which matters if you are holding both a home and an investment property and need to keep the debts separate. Some lenders only let you link an offset account to the variable portion. Ask your broker how the loan will be set up before you apply.
If you want to compare structures across lenders, our home loans page covers the main loan types, and our investment loans page covers the investor side.
Extra Repayments on a Fixed Loan Can Trigger Break Costs
Many fixed loans cap how much extra you can repay each year, and going over the cap can trigger break costs. The cap varies by lender and product, so check the figure in your contract.
This catches out people who receive a bonus or sale proceeds and try to pay the loan down in one go. If you expect lump sums, a variable portion with an offset account is usually more flexible. The trade-off is that fixed rates may be lower or higher than variable rates, depending on the lender and the time.
What to Do Before Your Fixed Term Ends
The cleanest time to change lenders is on or after the fixed term end date, because break costs do not apply once the term has finished. Time the refinance settlement for that date or later, and check the exact end date and any early-exit conditions with your lender. If you hold the loan to the end and then refinance or revert to variable, there is no break cost to pay.
The rate you roll onto can differ from what you were paying, as the loan typically reverts to the variable rate unless you choose a new fixed term. Our fixed rate expiry page explains your options, and the refinancing page covers what the switch involves, including discharge and registration fees. Compare the new rate and fees against what you pay now before you decide.
Questions to Ask Before You Fix
Before you fix, ask the lender four practical things: the extra repayment cap, whether an offset account is available, how break costs are calculated, and what happens if you sell. You can also ask for a written break cost estimate at any point, which gives you a real number rather than a guess.
If you are a Hornsby borrower who is not sure which questions matter for your situation, our local mortgage broker in Hornsby can walk you through them. Tax treatment of loan costs on an investment property varies, so talk to your accountant about your circumstances.
Call one of our team or book an appointment at a time that works for you. We will look at your loan, your plans and the real cost of leaving before you commit to a fixed rate.
Frequently Asked Questions
What is a break cost on a fixed rate home loan?
A break cost is a charge that may apply if you repay or refinance a fixed loan before the term ends. It is based on wholesale rate movements, your balance and the time remaining, and can be nil if rates have risen.
Do variable home loans have break costs?
No. Break costs apply to fixed rate periods. Exit fees were banned on new home loans from 1 July 2011, though discharge and registration fees can still apply when you leave.
What is a rate lock-in?
A rate lock-in holds a fixed rate between approval and settlement, often for around 90 days. A fee usually applies, and you may miss out if rates fall during that time.
How can I reduce break cost risk?
A split loan keeps part of the debt on a variable rate, so only the fixed portion can attract a break cost. The trade-off is less repayment certainty on the variable portion.
Can extra repayments trigger break costs?
Yes. Many fixed loans cap extra repayments each year, and going over the cap can trigger break costs. Check the limit in your contract.
