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.

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Two Red Shoes Copyright © 2020 All rights reserved. Call on 02 9002 0380, 0404 494 929, email us  or 'old school' fax 02 9002 0381

Jarrett Group Pty Ltd atf Jarrett Group Discretionary Trust trading as Two Red Shoes hold Australian Credit Licence No: 428614 and are members of an external dispute resolution scheme. Details of our complaint resolution process can be found here or please see our credit guide. All information contained on this site is general information only, and does not take into account your particular financial situation or needs. You should consider your personal objectives, financial situation along with the recommendations of your trusted advisors.

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