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:
Sell your property
Switch to a different loan type or refinance the loan
And / or Repay more than the allowed repayments – pretty important to note.
Most lenders allow up to $10,000 per year in additional repayments during a fixed rate without penalty (can’t access them in most cases though) which is roughly $200 a week and usually not an issue. Just be aware of this.
When considering a fixed rate you should think about your future plans, if you’re thinking about selling or if you’re expecting to be able to make extra repayments then talk with us about how you can structure the loan to benefit from the fixed rate and still have the flexibility you need.
