Break costs are fees your mortgage lender charges for extra repayments on a fixed-rate mortgage. Break fees are either a lump sum added to your mortgage loan or an increase in your interest rate. Most lenders are unwilling to waive this break cost if you decide to pay off your home loan early or refinance. But why?
Why Won’t Banks Waive This Fee?
When you secure a fixed rate home loan, your lender borrows money from other institutions, such as wholesale money markets. This transaction is subject to the Bank Bill Swap Rate, which is set at the same time your fixed interest rate is. Your lender cannot repay the money early. Therefore, when you repay your home loan early, they are still stuck paying their BBSR. If they waive your break costs, they are losing money on your loan.
When Will a Bank Charge You Break Fees?
Banks may charge you break fees for any number of reasons, including:
- If you repay your entire loan before the end of your fixed term.
- If you sell your home within the fixed period.
- If you make an extra repayment during the year.
- If you are in default
- If you switch to a variable rate loan, interest-only loan, or refinance.
Is Refinancing Still Worth It, Even With Break Costs?
In most cases, yes, refinancing your existing loan is still worth it. For example, if you pay a higher interest rate than the national average for the next year, you may save money when refinancing despite factoring in break costs. However, consulting with a mortgage broker is still recommended.
If you are considering refinancing your home loan, the brokers at Mortgage House can help. First, we can help you figure out your break costs using your lender’s formula. Then, if we discover refinancing can save you money, we can help you find a more competitive loan than your current one.
