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Can I pay out my fixed rate home loan in full?

Can I pay out my fixed rate home loan in full?

Break Costs

We understand your circumstances may change which might require you to payout your loan completely or change your fixed rate loan by changing the loan type. However to do so, you need to ‘break’ the terms of your loan contract. A break cost fee is intended to recover any loss that Greater Bank will incur when a customer breaks their fixed rate contract; which can happen as a result of changes in interest rates.

A break cost fee may be payable if the loan is repaid before the end of the fixed rate period, or if you switch to another loan type during the fixed rate period e.g. from a fixed rate to a variable rate.

The break cost fee is an estimate of the interest we should have received for the rest of the fixed rate period compared to the interest we would receive if we relend those funds. We compare the interest rate you locked into the equivalent current interest rate based on the time remaining on your fixed rate period.

If fixed interest rates have increased since you locked in your fixed rate, it’s quite possible that you won’t be charged a break cost fee. We only charge a break cost fee if we will incur a loss as a result of you breaking your fixed rate loan.

A simple version of the break cost formula is:

Break Cost = Loan Balance Owing x Interest Differential x Remaining Fixed Period

Simple example break cost calculations

Example 1

  • Loan balance of $300,000 with a fixed rate of 5.00% for 5 years, which is repaid after 2 years. The time remaining for the fixed rate term locked in is 3 years and the current 3 year fixed rate is 4.00%.
  • Break Cost fee = $300,000 x 1.00% x 3 years
  • Break Cost fee = $9,000 approximately

Example 2

  • Loan balance of $300,000 with a fixed rate of 4.80% for 5 years, which is repaid after 2 years. The time remaining for the fixed rate term locked in is 3 years. The fixed rate of 4.80% is the discounted interest rate (fixed rate less a discount of 0.20%). The current 3 year fixed rate is 4.00% and the equivalent current rate after allowing for a discount of 0.20% is 3.80%.
  • Break Cost fee = $300,000 x 1.00% x 3 years
  • Break Cost fee = $9,000 approximately

Example 3

  • Loan balance of $300,000 with a fixed rate of 4.00% for 5 years, which is repaid after 2 years. The time remaining for the fixed rate term locked in is 3 years and the current 3 year fixed rate is 5.00%.
  • Break Cost fee = $NIL approximately
  • A break cost fee would not apply as there is no loss, because we can re-lend the loan funds at a higher interest rate.