Ending your fixed rate home loan period early – things to consider

Before you take out a fixed rate home loan, it’s worth thinking ahead to any possible scenarios where you might want to break the fixed rate period early. Why? Because a fixed rate break cost might apply. This can be large – maybe even in the thousands of dollars – and can vary from day to day. A set administration fee may also apply.

This guide helps to explain how the fixed rate break cost is calculated and when this fee may apply.

About the fixed rate period
About the fixed rate break cost
How is the fixed rate break cost calculated?
About the fixed rate break administration fee
When could a fixed rate break cost and administration fee apply?
Ways to avoid a fixed rate break cost
Before you decide to break your fixed rate loan

About the fixed rate period

When you get a fixed rate home loan, your interest rate and repayments are locked in for an agreed period of time.

It means you have the certainty of knowing what your repayments will be and that they’re protected against future rate changes during the fixed rate period. The trade-off is that there’s less flexibility to make changes to your loan during the period.

About the fixed rate break cost

When you take out a home loan, we typically borrow money from other banks and businesses in the wholesale money market to fund your loan. And when you lock in your interest rate with a fixed rate home loan, we also lock in our funding costs at a fixed rate to manage the risk of interest rate changes.

If you break your fixed rate period early, we’re still obligated to repay those in the wholesale money market for the rest of the fixed period. A fixed rate break cost will apply if we’ve made a loss and need to cover it. We don’t profit from charging the fixed rate break cost.

You can find out more about fixed rate break costs in your home loan contract and the home loan terms and conditions provided with your loan.

You can also get an estimate of fixed rate break costs by getting in touch with one of our Home Lending Specialists.

How is the fixed rate break cost calculated?

It depends on a number of factors, including how long you’ve got to go on your fixed rate period and your current loan amount. We also take into account what the rate was in the wholesale money market at the time we borrowed to fund your loan (the ‘funding rate’) and what the rate is when the fixed rate period is terminated early (the ‘investing rate’). The fixed rate break cost covers the difference between these rates.

These wholesale money market interest rates can change substantially from day to day, so any fixed rate break cost quotes you’re given are only valid for that day and subject to change.
 

Fixed rate break cost calculation example

Let’s say the rate in the wholesale money market when you took out a 5-year fixed rate loan was 5.50% p.a., and now it’s 3.00% p.a.. Now let's say you decide to break your fixed rate loan with 2 years to go on the fixed rate period, and your current loan principal is $300,000.

To estimate the break cost, the following formula is used:
(Rate when the fixed rate loan was taken out – rate when the fixed rate period ended early) x remaining fixed period of loan x current loan principal = fixed rate break cost.

For the example above, the calculation would be:
(5.50%p.a. – 3.00% p.a.) x 2 x $300,000 = $15,000

This means your estimated fixed rate break cost would be $15,000.

Keep in mind that the exact calculation of the break cost amount also includes additional factors, like the value and timing of the remaining cash flows based on current market interest rates determined by us.

About the fixed rate break administration fee

This is a set fee that’s charged to cover the costs associated with processing a full prepayment to your home loan. This fee is outlined in your home loan contract.

When could a fixed rate break cost and administration fee apply?

You may need to pay these costs if, during your fixed rate period, you:

1. Switch or split your loan

This means switching from a fixed to a variable rate home loan, or even to another fixed rate home loan. It also includes splitting your fixed rate loan between fixed and variable.

2. Increase your loan (also known as a top up)

You might want extra funds and decide to increase the limit of your fixed rate loan.

3. Pay off some of your loan early

For example, if you ask us to reduce the limit of your fixed rate loan, or if you make extra repayments on your fixed rate loan above the allowed yearly $10,000 maximum. Note that if you do make extra repayments above the maximum, we may refund this money to you – refer to your home loan terms and conditions for more info.

4. Pay off your whole loan early

For instance, if you sell your property and use the sale proceeds to repay the home loan in full during the fixed rate period.

Ways to avoid a fixed rate break cost

If you want to pay off your fixed rate loan faster

You can make extra repayments of up to $10,000 a year without needing to pay a fixed rate break cost.

If you need to access extra funds by increasing your home loan

You might want to consider applying for a new, separate home loan instead. Our lending criteria will apply.

Before breaking your fixed rate period

It’s important to consider how breaking your fixed rate home loan will affect you financially and to explore your options. To understand more about your options and what your potential costs would be, talk to one of our Home Lending Specialists.

Talk to us about your options

Book time with a Home Lending Specialist – when and where it suits you. Talk on the phone, meet at a branch, or have a Mobile Lending Manager come to you.