What are Break Fees and How Can You Avoid Them?

Let’s be honest, no one likes paying fees, and sometimes it can feel like there are fees for everything under the sun. In this post we deep dive into break fees, why banks charge these, how to avoid paying them, and why sometimes you can actually save money paying these fees!

What are break fees?

Break fees are designed to help cover the cost incurred by the banks when a borrower breaks their loan terms. Because while you might be borrowing from your bank, they are then borrowing from a wholesale funder and they are incurring penalties by breaking the terms early. Therefore this cost is passed on to you, the borrower. 

Break fees vary greatly between bank to bank (and one of the reasons we encourage you to shop around!). They also depend on factors such as the type and length of loan, the amount borrowed, the current and fixed interest rates, and the admin charges incurred. Generally though, the longer the remaining fixed term, the higher the break fee will be. 

Break fee exceptions

There are some exceptions when break fees might not apply, and this is generally if the interest rates now are higher than the fixed term rate. For example if last year you fixed your loan for 3 years for 4.5% and now the 3-year rate is 6.5%, you may not have to pay the break fee since the bank is technically not losing out if they re-lend that money out at a higher rate. However, with the interest rates in decline, it's unlikely we'll see this scenario playing out too often.

Floating rates usually are more flexible too and don’t usually incur break fees, allowing borrowers to make lump sum payments, restructure, or pay in full without being penalised for doing so. 

When paying them might work in your favour

There are some times when paying the break fees can actually save you money. For example, it could be more cost-effective to foot the fees and move your loan to another bank with more preferable loan terms or a lower interest rate.

It’s a good idea to get a mortgage advisor like the team at Loan Market Queenstown to do some calculations for you and check both the new lending terms and calculate the break fees to see what’s more cost effective in the long run. 

How to avoid break fees?

Our tip? Be really upfront with your bank or advisor about your current situation and future lending goals. This means that we can create a loan structure that fits you both now and in the future. This means you are less likely to need to restructure your loan, saving on break fees! 

Of course things do happen, so if your circumstances change we can work with you to find the best scenario for you and your property. Get in touch today to book your appointment and let's see if we can save you any $$$ on your current loan.