How much does it really cost to exit a fixed loan?

A fixed rate mortgage offers security and peace of mind that your repayments won’t change for a set period of time.

But if you need to get out of your loan for whatever reason – perhaps your housing needs have changed, your work has prompted you to move, or a relationship breakdown is forcing changes – then you may need to look at exiting that loan so you can move on.

In this scenario, your bank can slug you with an exit fee. Exit fees (also known as break fees) are shrouded in mystery and banks don’t always disclose their break fees, or how they calculate them.

Our finance team was recently talking to a client who was thinking of buying a new house, but when she asked her lender what the exit fee would be on her existing three-year fixed loan, the bank couldn’t give her a straight answer.

“It changes daily and is very difficult to calculate. It’s not my department but I can transfer you to someone who can help, if you’re seriously interested in leaving your loan today?” the customer service agent advised.

Not very helpful. Obviously, our client wasn’t in a position to exit her loan an that particular day. What she wanted was a ‘ballpark’ figure so she could understand her options, but her bank wasn’t able to provide that.

Why do banks charge loan exit fees?

When a bank sources the funds for a fixed interest rate loan, they borrow money from the wholesale money markets using the Bank Bill Swap Rate (BBSR or BBSW).

Your bank’s BBSW rate and term is locked in at the same time as your interest rate, so if you borrow $500k for three years at 4.5%, they also commit to borrowing $500k for three years (at a lower interest rate – that’s how they make a profit!).

If you repay the loan early, they have to lend that money to someone else whilst ensuring they make a profit on that new loan. Therefore, generally speaking, the amount you will be charged to exit your fixed rate loan depends on how much the bank stands to gain or lose by letting your loan go - or how much they believe they stand to gain or lose.

If you locked in a very low interest rate, and the BBSR on the wholesale market has increased since you first fixed your loan, it will be in the bank’s best interest to allow you to exit your loan. After all, it means they can re-lend that money at a higher interest rate, giving them a better return.

However, if you are locked in at a higher interest rate, and fixed rates have fallen since then, it will not be in the bank’s interest to allow you to exit your loan. As a result, they will charge you an exit fee so they’re not out of pocket.

How to calculate your loan exit fees

Calculating your loan exit fees doesn't need to be too difficult. As experienced finance brokers, we may be able to assist you in working out how much you could be required to pay.

To get a realistic indication of how much exiting your loan may cost you, you need to know three main pieces of information:

  • The loan term of your fixed rate, and the outstanding period (eg 3-year fixed rate with 1 year and 8 months outstanding).
  • The fixed interest rate you locked in.
  • The fixed interest rate offered by the bank for that same loan period today.

With this information, it may be possible to get a ballpark figure of your exit fee. Here are a few examples:

Amount: $630,000

Fixed period: 5 years

Time remaining on loan: 3 years 8 months

5-yr rate at time of fixing loan: 4.45%

5-yr rate today: 4.25%

EXIT FEE: $4,620

Amount: $490,000

Fixed period: 3 years

Time remaining on loan: 1 year 6 months

3-yr rate at time of fixing loan: 3.99%

3-yr rate today: 4.75

In this case the bank should be able to easily re-lend the funds to another client at the higher rate.

Amount: $550,000

Fixed period: 5 years

Time remaining on loan: 4 years 6 months

5-yr rate at time of fixing loan: 5%

5-yr rate today: 4.25%

EXIT FEE: $18,560

Keep in mind that these calculations are a guide only and there may be additional fees and charges applicable, depending on your specific bank or lender. If you are thinking of exiting your loan and wish to discuss your options, we are always happy to help. Contact our finance team today on 1300 905 680.