Break costs...explained


Break costs: A cost incurred for paying out a loan balance on a fixed term loan before the term has expired.

In shorthand these are a complicated calculation ending in a penalty that you will pay for breaking the fixed rate early.

The longer explanation is it’s a penalty that reflects the loss of income the lender will incur because of the fixed rate ending early, basically, if they had leant the money to you for 5% (for example) and you had a year to go, and now they can only get 4% from another borrower, they want you to cover the 1% difference for the balance of the term. In actuality lenders are borrowing the money themselves and agreeing to a fixed contract with their lenders that they have to honour, so they are passing on their loss to you.

I can’t stress enough to you to treat a fixed rate as a contract and understand exactly what you are agreeing to as you would with any contract (and for a lot of borrowers it’s a very good idea to fix at least part of your loan).

Its important to note you can incur a break cost if you: