What are break costs?
When taking on a loan through all lenders there are 2 main break costs: the discharge fee charged when you release a property from the lender (this is usually pretty small); and the fixed rate break cost, which is a fee charged when you break your loan – even if the loan is staying with the same lender. The break cost is charged when you break a high interest rate in favour of a cheaper one. For example, if you have a loan at 9.5% and you want to cancel the loan in favour of a loan at 7.5% the lender is then stuck with expensive funds that can only be put into the market at the current cheaper rate, therefore they are losing the margin – this loss is passed on to you. Two recent examples I came across were: $316,000 mortgage, 28 months remaining on the term at 9.29%, monthly repayments of $2,446. The break cost was $7,699. Refixing for 6 months at 7.99% would reduce the monthly payment to $2,104, saving $342 per month. The second example was a $205,000 mortgage, 29 months remaining at
The term used when a fixed rate loan is being paid out or a principal reduction is being made. It means the Fund Manager calculates the difference between the current fixed rate you are on and the current cash rate, multiplied by the remaining term of the fixed period. The figure can be sizable and it is strongly suggested that before fixing all or part of your loan you should determine that you are not going to sell your property or make extra principal repayments or change your lender during the fixed term.
