The potential $35,000 cost of breaking a fixed home loan

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on July 28, 2020
The potential $35,000 cost of breaking a fixed home loan

Photo by Ben White on Unsplash

With the Reserve Bank's cash rate cuts this year driving fixed interest rates on home loans down to historic lows, experts are warning borrowers about break fees.

A break fee is a charge borrowers face if they exit a fixed home loan early, and is usually a calculation based on the lender's wholesale funding rate at the time of the fix, and now.

The larger the difference between the wholesale funding rates, the larger the break fee is likely to be.

However, following multiple cash rate cuts down to a historic low of 0.25% in March, what was once a good rate only a year ago might now be mediocre, and the temptation to break out of a fixed loan is strong, according to the experts.

Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Lender

Fixed
More details
No ongoing feesFree redraw facility
No ongoing feesFree redraw facility

Live-in Fixed Loan (Principal and Interest) 1 Year

    Fixed
    More details
    NO UPFRONT OR ONGOING FEES
    NO UPFRONT OR ONGOING FEES

    Basic Home Loan Fixed (Principal and Interest) (LVR < 70%) 3 Years

      Fixed
      More details

      Fixed Rate Home Loan (Principal and Interest) 3 Years

        Fixed
        More details

        Fixed Options Home Loan (Interest Only) 2 Years (LVR < 70%)

          Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of June 25, 2022. View disclaimer.

          Break fees 'up to $35,000'

          Pure Finance managing director Brendan Dixon has seen a wide range of break fees with borrowers chasing a better deal.

          “We’ve seen break fees ranging from a few thousand up to $35,000,” he said.

          “The $35,000 example was someone who fixed for five years at 3.70%. At the time, it was a fantastic deal for the customers who were attracted to the low interest rate over a long period.

          “The world changed since then, and now fixed rates are as low as 2.19%.

          “When this fee was compared to the potential savings possible with the new product, it didn’t make sense to pay the break fee."

          Due to the severity of the rate cuts, the cost of breaking the fixed term might not be as much as the potential savings by refinancing, but borrowers will have to do their homework, according to Mr Dixon.

          "Conversely, some customers who are approaching the end of their fixed term might have a small fee payable which is counteracted by the savings of switching, and so it makes financial sense to pay the fee," he said.

          "The fixed loan is a two-way agreement between you and the bank. They will give you the rate you desire but you have to stay in the product for the term.

          "Right now we are helping a lot of clients to assess the benefit of fixing and often clients are seeing the benefit."

          Is fixing a home loan a good idea?

          Experts generally opine that fixing is a good idea for some, and a not so good idea for others.

          Mr Dixon says borrowers will have to assess their own situation before fixing their rate.

          “The main consideration with fixing a home loan is ensuring you avoid a future break fee, because this defeats the purpose of taking the lower rate,” he said.

          “The other consideration is that with most fixed loans, not all though, you can’t make too many additional repayments and you also can’t have a linked offset.

          Although, a more flexible arrangement might be to fix a portion of a home loan, according to Mr Dixon.

          “If your goal is to knock your loan down in record time then a fixed loan may not be for you,” he said.

          “With clients that have this goal, we might recommend a split loan which is where you fix a portion of your loan (say, 70%) and then leave the rest as variable.

          “That way, you can make extra repayments on the variable loan (and have an offset if you like) whilst also making the most of low fixed rates for the bulk of your debt.”

          Co-founder of Atelier Wealth, Aaron Christie-David, also pointed out some of the restrictions of fixed rates. 

          “Yes, rates are low, however most borrowers are unaware that a fixed rate loan can be restrictive, for example, max $10,000 in additional repayments per annum, no offset account linked, [and] break fees,” he said.

          With fixed rates now commonly lower than variable ones, Samuel Philipos from the Benevolence Financial Group says fixing could provide certainty and a way to reduce expenses.

          “A silver lining during these troubled times is saving borrowers thousands of dollars on their home loan,” he said.

          “During the global pandemic, it would be wise to look at reducing expenses particularly with the largest household expense: your mortgage.”

          Mr Dixon said fixing could be a good idea, provided it suits borrowers' longer term goals.

          "There is a big gap between fixed and variable at the moment and this is because of the two rate cuts in March when the banks passed on one rate cut to all variable and fixed loans, but the second cut was only passed on to fixed loans, as well as an increase to term deposit rates," he said.

          "This means that fixed loans got a double reduction in March and this triggered mass competition between the banks to secure clients.

          "Banks are nervous and need customers right now."

          Buying a home or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for owner occupiers.

          Lender

          Variable
          More details
          UNLIMITED REDRAWSSPECIAL OFFER
          • Fast turnaround times, can meet 30-day settlement
          • For purchase and refinance, min 20% deposit
          • No ongoing or monthly fees, add offset for 0.10%
          UNLIMITED REDRAWSSPECIAL OFFER

          Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

          • Fast turnaround times, can meet 30-day settlement
          • For purchase and refinance, min 20% deposit
          • No ongoing or monthly fees, add offset for 0.10%
          Variable
          More details
          100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES
          • No upfront or ongoing fees
          • 100% full offset account
          • Extra repayments + redraw services
          100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

          Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

          • No upfront or ongoing fees
          • 100% full offset account
          • Extra repayments + redraw services
          Variable
          More details
          NSW/VIC/SA METRO & INNER REGIONAL AREAS
          NSW/VIC/SA METRO & INNER REGIONAL AREAS

          Variable Home Loan (Principal and Interest)

          • $5000 Cashback. T&Cs Apply.
          Variable
          More details
          REFINANCE ONLY
          • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
          REFINANCE ONLY

          Variable Rate Home Loan – Refinance Only

          • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
          Variable
          More details
          NO ONGOING FEESFREE REDRAW FACILITY
          • Rate Match Guarantee. Tic:Toc will match the rate on identical variable P&I home loans. T&C's Apply.
          NO ONGOING FEESFREE REDRAW FACILITY

          Live-in Variable Loan (Principal and Interest) (LVR < 90%)

          • Rate Match Guarantee. Tic:Toc will match the rate on identical variable P&I home loans. T&C's Apply.

          Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of June 25, 2022. View disclaimer.


          Disclaimers

          The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

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          Harrison is Savings.com.au's Assistant Editor. Prior to joining Savings in January 2020, he worked for some of Australia's largest comparison sites and media organisations. With a keen interest in the economy, housing policy, and personal finance, Harrison strives to deliver and edit news and guides that are engaging, thought-provoking, and simple to read.

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