What are home loan break costs?
Before 1 July 2011, if you had wanted to cancel your home loan contract before the loan term expired, you would have usually incurred break costs or exit fees. It was up to each lender to determine what their break costs were, and they were also calculated differently. These costs or fees were a major deterrent for consumers who were comparing home loan rates and wanting to switch home loans.
The Federal Government stepped in and legislated that from 1 July 2011, lenders were no longer able to charge customers who wished to repay their home loan early.
Despite these changes, if you refinance your home loan you may still be charged a discharge fee from your existing lender, plus application fees or upfront costs by your new lender. There are also government duties/charges to take into account when refinancing.
Refinancing home loans with no upfront costs:
Fixed rate break costs
If you have a fixed rate home loan and you are still in the fixed period, you may incur additional charges if you refinance and exit from your loan.
This is because the lender is essentially going to lose the money it was expecting to receive as income from your loan’s interest, leaving a gap in its previously prepared budget. As a result, the lender will calculate how much they will lose by you ending the loan contract ahead of schedule and charge you accordingly.
Because the break costs of leaving a fixed rate home loan early can prove quite expensive, it’s often worth considering whether it would be more affordable to wait for the fixed interest period to expire before looking into refinancing the loan.
What do break costs mean for your refinance?
The more it costs to switch from one home loan to another, the less affordable your refinanced mortgage could ultimately turn out to be. Even if you switch to a mortgage offering a lower interest rate that saves you money on your home loan, it may take a long time for these savings to make up for these high switching costs and ultimately “break even” on your home loan.
To help you work out which home loan terms will ideally suit your current financial situation when refinancing, Australia’s home loan comparison site, RateCity.com.au, has some great home loan calculators. Plus, you can compare fixed rate home loans, variable rate home loans and also review our home loan guide for information when choosing a home loan.