Breaking a fixed-term mortgage comes with a cost, but you may find it’s worth it.
How do break fees work?
The way banks calculate break fees is a complicated process.
An extremely simplified version is this: The bank looks at the interest rate you are committed to, the amount of your loan and the term you have left to run. Then it looks at what it could charge someone else for the same amount of money.
If you have $500,000 fixed for another year at 6.5 per cent, the bank will consider that the most it could get for the same chunk of money lent to someone else for the next year is about 5 per cent. So it might ask to be compensated for the difference of 150 basis points, or about $7500 for the year.
The key then is to refix at a much better rate so that the interest savings make the break fee worthwhile.
The difference in repayments between a $500,000 loan at 6.5 percent and a loan at the current cheapest two-year rate of 5.65 per cent is about $895 a fortnight so you would save the cost of the break fee in 10 months.
Banks also apply administration fees. The break fee can vary day by day.
If you would like an opinion on whether it is worth breaking your fixed rate please get in touch.