Mortgage Break Fees Explained: Understanding the Costs of Breaking Your Fixed Rate Early.

Break fees, also referred to as early repayment adjustments, are costs charged to borrowers when they repay or adjust their loan before the end of the agreed fixed term.

Lenders impose these fees to compensate for the potential loss of interest they would have earned if the mortgage had continued as initially agreed. 

Break fees commonly arise when refinancing, selling a home, or paying off a mortgage early.

Why do Lenders Charge Break Fees?

Break fees may seem like an additional burden to borrowers, but they serve a legitimate purpose.

These fees cover the real cost incurred by the banks when borrowers break their loan terms.

When a loan term is broken, the bank must terminate the funding arrangements it has with wholesale funders, which incurs penalties for the bank.

Passing on these costs to borrowers through break fees helps maintain a fair balance between lenders and borrowers.

So, how are Break Fees Calculated?

Break fees can be complex and vary from one lender to another.

They are typically calculated based on factors such as the outstanding loan amount, time remaining on the fixed term, the difference between the fixed rate and current market rate, plus the lender's administrative costs.

Generally the longer the remaining fixed term, the higher the break cost will be. 

However, the potential benefits of breaking a mortgage early can outweigh the break fee if the benefit gained is more significant than the break fee.

To get an accurate break fee calculation, it is advisable to talk to a Mortgage Adviser as close as possible to the desired break date so we can approach the lender on your behalf and guide you on the next steps.

Exceptions to Break Fees

There are situations where you may be exempt from paying break fees.

For instance, if the market interest rate is higher than the fixed-term rate at the time of breaking the loan, there is a chance that the break fee may not apply.

As an example, if you had fixed your mortgage a couple of years ago at 4.50% for two years and now the rate is 6.29%, you may be exempt from paying the break fee as the market rate is higher - so the bank won't be losing on interest if they re-lend that money at a higher rate.

Additionally, loans on a floating rate usually offer more flexibility, allowing borrowers to make lump sum payments, pay in full, refinance, or restructure without incurring break costs.

Another exception could be if you take advantage of porting your mortgage - which is a home loan feature that allows you to keep the same home loan when selling and buying at the same time. You are effectively swapping the property securing the mortgage from your current property to a new one (this needs to happen simultaneously to avoid break costs). 

How to Minimise Break Fees

Although it may not be possible to completely avoid break fees in certain situations, there are strategies you can use to minimise their impact.

One effective approach is to have a clear & concise mortgage structure tailored to your specific situation.

While interest rates are an important part of the equation, a good mortgage structure involves more than just rates.

It encompasses factors such as loan flexibility, repayment options and potentially different loan terms and splits.

By optimising your mortgage structure, you can align it with your financial goals and reduce the likelihood of incurring substantial break fees.

Working with a knowledgeable Mortgage Adviser can provide valuable insights and guidance in managing break fees and optimising your mortgage structure, so before making any decisions regarding your mortgage, make sure to reach out if you need a hand.