Break fixed home loan: costs, fees and how it works
Thinking about breaking a fixed home loan? Learn how break costs are calculated, what fees may apply, and when refinancing, selling or switching loans can trigger a break cost.
Breaking a fixed home loan means ending your fixed-rate period before the agreed term finishes. When this happens, your lender charges a break cost, a fee that reflects the financial loss the lender incurs when you exit early.
Break costs can be significant, and interest rate movements at the time of exit also affect the final figure.
What is a break cost on a fixed home loan?
A break cost is a fee a lender charges when a borrower ends a fixed-rate home loan contract before the fixed period expires. It is not a penalty in the traditional sense, it reflects the lender’s estimated financial loss from the early exit.
When a lender offers a fixed rate, it locks in funding for the same period. If you end the loan early and interest rates have fallen since then, the lender may not be able to reinvest those funds at the original rate. The break cost helps cover that loss.
The Australian Financial Complaints Authority (AFCA) establishes that a reasonable break cost calculation must compare the wholesale interest rate for the original loan term. This comparison is made against the wholesale rate for the remaining term, at the time of early repayment.
This method is used across major Australian lenders.
Break costs are also referred to by several different names:
- Early Repayment Adjustment (ERA) is a common term used by some lenders for break costs.
- Early repayment fee (ERF) or Economic cost is another term used by some lenders to the same charge.
- Fixed rate unwind adjustment refers to the same calculation that unwinds the original wholesale funding position.
- Early payment interest adjustment (EPIA) is a further label some lenders use for break costs.
When does a break cost apply?
A break cost applies any time a borrower ends or materially alters a fixed-rate contract before its expiry date. Here’s four things that commonly trigger this charge.
Refinancing to another lender
Refinancing to a different lender during a fixed period ends the existing fixed-rate contract. The lender works out the break cost based on the interest rate difference and the time left on the fixed term.
Selling the property
Selling a home before the fixed term ends triggers a break cost because the loan must be discharged. The cost applies even if the sale is not voluntary.
Switching from fixed to variable
Switching loan types from a fixed rate to a variable rate during the fixed period is treated as a contract break. An administrative fee can also apply in addition to any break cost calculated.
Making large extra repayments
Most lenders allow a limited amount of extra repayments before triggering break costs.
Exceeding these thresholds set by the lender triggers a break cost on the excess amount.
How is a break cost calculated?
Break costs follow a three-part formula that starts with the remaining loan balance. That balance is multiplied by the difference between wholesale rates at the start of the fixed term and wholesale rates today. The result is then multiplied by the remaining term in years.
The key variables are:
Wholesale interest rates are not publicly displayed, they are commercially sensitive. A lender calculates the current rate at the time a break cost quote is requested. Because rates move daily, a quote is only valid for a short window.
Break cost direction
Break costs only apply when current wholesale rates are lower than the rate locked in at the start of the fixed term. If wholesale rates have risen since the fixed rate was set, the lender does not face a loss. In that scenario, no break cost applies.
What other fees apply when breaking a fixed home loan?
Beyond the break cost itself, several other fees can apply when exiting a fixed home loan. These are separate charges and should be factored in alongside any break cost quote.
The discharge fee is charged by the current lender to release the mortgage on the property title.
The application fee and valuation fee are charged by the new lender on a refinance. Not all lenders charge these.
Is a break cost the same as an exit fee?
Break costs and exit fees are different things. Exit fees were banned for new variable-rate home loans entered into on or after 1 July 2011. Break costs are a separate category and remain permitted under Australian law for fixed-rate loans.
How much can a break cost be?
Break costs vary widely. The actual amount depends on three factors: the size of the remaining loan balance, how much rates have moved since the fixed term started, and how much time remains on the fixed period.
The same $300,000 loan could produce a break cost of $0 if wholesale rates have risen. If rates have fallen significantly, the cost could reach several thousand dollars. There is no fixed scale.
The only way to get a specific break cost is to request a formal quote from the lender. This quote reflects the wholesale rates on that day. Rates move daily, so the figure received today can differ from a quote obtained next week.
What happens when a fixed term ends without breaking it?
When a fixed term expires, the loan reverts to the lender’s standard variable rate. These revert rates are typically higher than rates available for new loans.
Reviewing loan options before the fixed period ends, rather than after, gives borrowers more time to compare.
Frequently asked questions
Can you break a fixed home loan at any time?
A fixed home loan can be ended early at any time during the fixed period. The lender does not prevent the exit, but a break cost can be charged under certain conditions. This applies when current wholesale rates are lower than the rate locked in at the start of the fixed term.
The decision to switch depends on whether the break cost and other fees make the change worthwhile.
How do I find out my break cost?
Contact the lender directly and request a formal break cost quote. The quote is calculated using the current wholesale interest rate for the remaining term of the fixed period.
Because wholesale rates change daily, the quote is time-limited. Ask the lender how long the quoted figure is valid for.
Does breaking a fixed loan affect my credit score?
Ending a fixed home loan early and refinancing to a new lender requires a credit application. New credit applications result in an enquiry on the credit file. Multiple enquiries in a short period can affect a lender’s assessment of an application.
What is an early repayment adjustment (ERA)?
An early repayment adjustment (ERA) is another name for a break cost. An ERA is the fee a lender charges to recover the financial loss from a fixed-rate contract being ended early.
The term ERA is used by some lenders in place of the term break cost. However, the underlying calculation methodology is the same.
Can making extra repayments trigger a break cost?
Extra repayments on a fixed home loan can trigger a break cost if they exceed the lender’s prepayment threshold.
Thresholds differ between lenders.
About Unloan
Unloan is a low variable rate home loan built by CommBank, Australia’s largest lender. Unloan has no application, ongoing, banking, account change, or exit fees*. The variable rate includes a loyalty discount that grows by 0.01% p.a. every year you stay (up to 30 years).
Unloan has been awarded Canstar Outstanding Value, Variable Home Loan Lender for 2023, 2024, 2025 and 2026. Apply online with conditional approval in minutes, manage your loan through the app, and access unlimited free redraw. You will also get live Australian support from home loan specialists. Use Unloan’s borrowing power calculator for an estimate of your borrowing capacity.
Unloan is a division of Commonwealth Bank of Australia.
Applications are subject to credit approval, satisfactory security and you must have a minimum 10% deposit or 10% equity in the property (LVR below 90%). Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. You cannot borrow more than $2,000,000 of above 80% LVR loans. In some cases depending on the property’s location or type, we may only be able to lend you up to 70%.
Unloan offers a 0.01% per annum loyalty discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan. The loyalty discount is applied to your variable rate at the relevant time, and this rate may increase or decrease over your loan term. For more information view our rates and features.
*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.
Unloan is a division of Commonwealth Bank of Australia, and Commonwealth Bank does not provide tax (financial) advice under the Tax Agent Services Act 2009 (Cth). You should consider seeking independent tax advice from a registered tax agent, accountant or adviser before you make any decisions based on this information.
Applications are subject to credit approval, satisfactory security and you must have a minimum 10% deposit or 10% equity in the property (LVR below 90%). Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. You cannot borrow more than $2,000,000 of above 80% LVR loans. In some cases depending on the property’s location or type, we may only be able to lend you up to 70%.
Unloan offers a 0.01% per annum loyalty discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan. The loyalty discount is applied to your variable rate at the relevant time, and this rate may increase or decrease over your loan term. For more information view our rates and features.
*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.
Applications are subject to credit approval, satisfactory security and minimum deposit requirements. Full terms and conditions are found on our Unloan Terms and Conditions. Modified Terms and Conditions will be set out in our Notice of Variation Agreement, if you are approved. This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice.
Unloan offers a 0.01% per annum loyalty discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan. The loyalty discount is applied to your variable rate at the relevant time, and this rate may increase or decrease over your loan term. For more information view our rates and features.
*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.
