The risks of breaking a fixed rate mortgage

By Anouska Linz
Fixed rate home loans can be beneficial for mortgage holders as they provide stability. However, some are now looking to break their home loan to take advantage of the record low interest rates. But is it worth it?

Interest rates have not always been as low as they are now. In 2008, the RBA cash rate reached 7.25% and as a result, many borrowers fixed their home loans in case the interest rate went any higher. Unfortunately for them, the cash rate has dropped steadily to a low of 2.50%, so instead of saving money, they are now paying a lot more than those with a variable interest rate home loan.
Many borrowers choose fixed rate home loans so they will know exactly how much they will owe for every repayment during the fixed term. But fixed rate home loans do have some restrictions. Some lenders do not offer extra repayments on their fixed rate products and also have high break costs. Breaking a home loan is when a borrower:
  • Refinances to another home loan
  • Makes an extra repayment
  • Repay the full amount of the loan before the loan term ends.
Not all lenders have the same procedures when it comes to break fees. Therefore, you will need to speak with your lender about what break costs are involved and what warrants a break fee. Some lenders may allow a certain number of extra repayments each year without any fees being charged. Some lenders may also use different terms for break fees, so even if you don’t see those exact words, it doesn’t mean they won’t have some sort of fee for breaking a fixed rate home loan.

If you are considering refinancing to a variable interest as you believe it will be more cost effective, don’t forget to include the break fees in your research. These fees can often equal thousands of dollars and it could end up costing you more to refinance than to stay put. Many borrowers assume that a lower interest rate will save them money and this is often the case, but there are other costs involved that you will need to consider. For example, you may have a fixed rate loan of 9% with less than 10 months to go on the fixed rate period and you wish to refinance to a variable rate of 7%. But since you will only have to spend extra money on interest for the next 10 months, the extra break costs could end up costing you more than the higher fixed interest rate. 

Interest rates may be a prominent factor when it comes to choosing a home loan; however, there are other factors that will affect how much a home loan will cost you. Application fees, annual fees and Lenders Mortgage Insurance are just some of the costs you will need to include in your calculations before you refinance to another loan product or lender. So before you decide to break a fixed rate home loan, make sure you research whether it is worth the effort. 

Anouska Linz is Manager, Online Sales at State Custodians and has over 10 years’ experience in financial services, both in broking and banking. Holding a bachelors degree in accounting, Anouska quickly discovered a love for mortgage lending and assisting people to achieve their home ownership goals. She leads a team of highly experienced lending specialists who are passionate about finding lending solutions which result in real wins for the customer. She is also a massive netball fan.

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