Rate Lock-Ins and Break Costs: Everything to Know

Locking in a fixed rate gives you repayment certainty, but leaving that loan early can cost thousands of dollars. Knowing how the cost is worked out before you sign makes it much easier to choose the right home loan for your plans.

If you live in Melbourne's Bayside and are weighing up a fixed rate, this article covers what you are agreeing to and how to keep your options open.

What Is a Rate Lock-In on a Home Loan?

A rate lock-in means your interest rate is held at an agreed level for a set period, so your repayments do not move with the market during that time. The most common version is a fixed rate home loan, where the rate stays the same for a fixed term and then usually reverts to a variable rate.

The trade-off is flexibility. A variable rate loan has no break costs, while a fixed loan is a contract with the lender for the full term. If rates fall, you cannot simply take the lower rate. If your plans change, you may pay to leave. Features such as extra repayments and offset accounts can also be limited on fixed loans, and this differs between lenders, so check the product details before you apply.

Fixed Rate Break Costs: How the Calculation Works

A break cost is a charge from your lender when you repay a fixed loan before the term ends and wholesale interest rates have fallen since you fixed. It compensates the lender for the funding it arranged to match your fixed term.

The charge is based on movement in wholesale rates, not on the rate advertised to customers. A common rough guide is the loan balance, multiplied by the fall in the relevant wholesale rate, multiplied by the years left on the fixed term. Lenders use different formulas, and the final figure changes daily, so this is only an estimate. Only your lender can confirm the real number.

If wholesale rates have risen since you fixed, the break cost is usually small or nil. That means the same loan can cost nothing to exit in one year and a lot in another.

What Actions Trigger a Break Cost?

Break costs can apply any time you repay, refinance or materially change a fixed loan before the fixed period ends. Common triggers include selling the property, switching lenders and paying off a large lump sum.

Extra repayments are a quieter trigger. Many lenders cap how much extra you can pay on a fixed loan each year, and going over that limit can lead to a break cost. Variable loans do not have break costs.

Example: Selling One Year Into a Three-Year Fixed Term

Splitting a loan between fixed and variable limits how much of your balance can attract a break cost. Here is an illustrative example using a rate of 6.75% p.a.

Consider a Bayside buyer borrowing $600,000 and fixing the whole amount at 6.75% for three years. A year later, a job offer means they need to sell. With two years left, suppose the relevant wholesale rate has dropped by 1 percentage point. The rough guide gives $600,000 x 1% x 2 years, or about $12,000. Actual lender calculations vary, and this ignores discharge fees.

Now imagine the same buyer had used a split loan, with $300,000 fixed at 6.75% and $300,000 variable. Only the fixed half carries the charge, so the same rough guide gives about $6,000. The variable half can be repaid with no break cost.

The outcome is a lower exposure, and the buyer still had some repayment certainty. The trade-off is that the variable half moves with the market, so repayments can rise. You can test different splits with our mortgage repayment calculator.

Should You Refinance Out of a Fixed Loan Early?

Refinancing out of a fixed loan only makes sense when your savings over the coming years are larger than the break cost plus all switching fees. Those fees can include discharge, application and valuation charges, so ask for each one in writing.

Start by asking your current lender for a written break cost quote. Then ask a broker to compare it against the saving from a new loan. If the new loan saves you a certain amount each year, divide the total switching cost by that figure to see how long it takes to recover. For many borrowers, waiting until the fixed term ends is cheaper. Our refinancing team can run the numbers with you.

If your fixed term is close to ending, our fixed rate expiry page explains what to expect when your loan reverts to a variable rate.

Questions to Ask Before You Fix Your Rate

Before you fix, ask how long you realistically expect to keep the property and the loan. Fixing for a term longer than you expect to stay is where break costs tend to bite.

It also helps to ask your lender or broker these things:

• How much extra can I repay each year without a charge?
• Can I attach an offset account to the fixed portion?
• Does the lender allow a split between fixed and variable?
• What happens to my loan if I want to move and take it with me?

Answers vary by lender, and so do the fees. Checking up front costs nothing and can save you from an unpleasant surprise later.

If you already have a fixed loan and are unsure where you stand, a loan health check is a sensible starting point. Call one of our team or book an appointment at a time that works for you, and we will explain your options in plain language.

Frequently Asked Questions