Break Costs (Early Repayment Fees)
Break costs are fees charged by lenders if you terminate a fixed interest rate arrangement before the end of the agreed loan period.
Why would you break a fixed rate period early?
Your borrowing circumstances may change. You may want to switch lenders for a better deal, refinance your loan, place a higher proportion of your loan on a fixed or floating period, or you may simply want to sell your property.
How much are break costs?
The calculation of break costs for consumer loans is covered by the Credit Contracts and Consumer Finance Act. In effect, the Act requires that lenders only charge for the direct administration costs of the repayment plus the cost of re-investing those funds into the current loan market for the remaining fixed period of the loan.
For instance, if your fixed interest rate is lower than the lender's fixed interest rate on offer for the time remaining of your fixed rate period, there should be no financial costs to the lender for reinvestment. So, you should only be charged a standard administration ‘break fee', which is usually $250-$350.
If your fixed interest loan rate is higher than the lender's fixed interest loan rate on offer for the time remaining of your fixed rate period, there will be a cost to the lender for reinvestment of the funds back into the mortgage market at a lower interest rate.
This should be the difference in lost interest payments over that period. So, in addition to the standard administration break fee, you‘ll be charged the costs associated with reinvesting those funds. Each lender's calculations of this sum should follow the broad formula set out in the legislation.
