At Mortgage Link, we’ve received a lot of enquiries about this, so we’ve put together a simple guide to help you understand what mortgage break fees are, why they’re charged, and what to consider. Let’s dive in.

What are mortgage break fees? 

In simple terms, mortgage break fees are charges that lenders apply if you decide to end your fixed-rate mortgage early.  

A fixed-rate mortgage locks in your interest rate for a set period—often 6 months, 12 months, 18 months or even longer—meaning your repayments stay the same for that period. If you choose to “break” this fixed term, your current lender may charge a break fee. 

When do break fees apply? 

There are a few common scenarios where break fees may apply: 

• Refinancing to a lower rate – If rates drop significantly, you might be tempted to refinance to take advantage of the new, lower rate. Breaking a fixed-rate mortgage to do this would likely incur a break fee. 

• Selling your property – If you sell your home before the fixed-rate term ends and repay your mortgage, your lender may charge a break fee since they won’t receive the interest they expected over the full term. Pro tip: If you’re planning to sell soon, you might want to avoid refixing at the end of your term. Instead, consider switching to a floating rate until the house is sold. While usually higher than most fixed-term rates, a floating rate allows you to make early repayments without a break fee. 

• Switching to another lender – Once again, switching to a different lender for lower rates or other benefits before your fixed-term rate expires could also lead to break fees. 

Why do lenders charge break fees? 

Break fees are designed to cover any potential loss the lender might incur because of the early exit, especially when interest rates drop. 

When you lock in a mortgage rate, the lender commits to securing funds for that term through wholesale funding arrangements. If you decide to end the mortgage early, the bank must ‘break’ its funding arrangement, potentially incurring penalties or losses. To recover this, the bank passes the cost to you, the borrower, through break fees. 

How are break fees calculated? 

Break fees can vary widely depending on factors like: 

• Interest rate difference – Not your mortgage rate, but the wholesale interest rate the bank borrowed at when you locked in your mortgage and the current wholesale rate. 

• Loan balance – The bigger remaining balance on your mortgage is multiplied by the interest rate difference. So, a larger balance usually means a higher fee, as there’s more interest the lender stands to lose.  

• Remaining loan term – The fee is then calculated over the remaining years of your fixed term. 

For example, let’s say you fixed your mortgage for five years, with a wholesale rate of 4.00% when you started. A year later, you want to break your loan with $600,000 remaining, and the wholesale rate has dropped to 2.75%. The break fee might look like this: 

• Interest rate difference: 4.00% - 2.75% = 1.25% 

• Multiply by loan balance: 1.25% x $600,000 = $7,500 

• Multiply by remaining term (4 years): 7,500 x 4 = $30,000 total break fee.  

In short, the bigger the mortgage balance and the greater the fall in interest rate, the larger the break fee might be. 

Is breaking your fixed-rate mortgage ever a good idea? 

Should you break your fixed-rate mortgage? It depends on your unique situation, so we recommend talking to a Mortgage Link adviser to get a clear answer. 

There are a few things to consider, for example the potential long-term savings. If the new, lower rate saves you more in interest over time than the break fee costs, it might be worth it. It’s important to do the math.  

Also, consider the remaining term. If there’s only a short period left on your fixed term, it may make more sense to wait until it ends and avoid break fees altogether. On the other hand, if you still have several years left on a high fixed rate, breaking early might make financial sense.  

And of course, think about your overall financial goals. Are you trying to pay off your mortgage faster, reduce monthly expenses, or free up cash for other investments? Make sure breaking (or not breaking) your mortgage aligns with your plans.  

Get in touch: we’re here to help 

A Mortgage Link adviser can guide you through your options, help with calculations, and ensure the decision aligns with your financial goals. Remember – we’re here to support you every step of the way. Get in touch today for expert advice that’s tailored to you.