Break costs

By Nila Sweeney

Question: I’ve taken a $500,000 fixed loan for three years at 8.50%. I want to get out of it but still have another two years before the fixed term ends. Can I get out of this loan without incurring a break fee? Josh

Answer: We asked Miriam Agnos from Smartline for clarification:

“This has become a very common question in the past six to eight months, given the very low interest rates available. Unfortunately, the answer is no. Lenders don’t waive break fees when borrowers exit a fixed rate loan early.

When your $500,000 loan settled, the lender factored in a profit over three years. This profit is the difference between what they bought your funds at and the 8.50% pa they’ll charge you during that time. If you exit early, they miss out on that profit, and hence they charge a ‘break fee’.

Your loan manager or mortgage broker should be able to work out if it’s worthwhile exiting your current home loan and taking a lower interest rate loan (and paying the break fee). In my experience as a mortgage broker, this is rarely the case as the exit fee to break a fixed rate is usually thousands of dollars.”