Buying guide
How much are mortgage break fees?
Breaking a fixed rate can be pricey, but it might be worth it - here’s everything you need to know
When you borrow with a fixed mortgage rate your lender will charge you a fee if you repay your loan before that fixed term ends. This is called a mortgage break fee.
They’re a way for the lender to recoup the costs they incurred to provide lending, and they can be pretty expensive! Here’s everything you need to know.
Mortgage break fees - how much will I pay?
Unfortunately it’s impossible to know how much your mortgage break fees will be without talking to your lender. The banks all have their own way of calculating these, but generally they will consider:
The time left on your loan term
The amount of your loan
The interest rate fixed at the start of the loan VS interest rates no
Wholesale swap interest rates at the start of your loan term VS at the time you break your loan (these are the rates at which lenders exchange interest payments with each other, and they’re based on market expectations of future interest rates).
Your loan product. Higher break fees may be charged on specialist lending products like Clean Energy Loans.
As a rule, your break fees will be higher if you’ve got longer on your loan term, your interest rates are higher than current market interest rates, and your loan amount is larger. If you’re breaking your loan to switch to a similar or higher interest rate with the same bank, you may not pay any break fees.
Note: most banks publish the methods they use to calculate break fees.
If you’d like to have a look, we’ve gathered explanations of their break fees from NZ’s five biggest banks:
ANZ (under early repayment recovery for ANZ Home Loans with a fixed rate)
A warning - these are a little confusing and for most borrowers they won’t be very helpful. They also include lots of values that aren’t specified (wholesale swap rates calculated by the bank).
When do break fees apply?
The best way to figure out when break fees apply is to check the terms in your loan documents. That said, as a general rule you can expect these fees if you do any of the following during your fixed term:
Repay your entire loan
Repay part of your loan
Refinance to another bank
Refinance to a different rate with the same bank
Sell the home or investment property the loan is secured against
In some cases you may also be charged a break fee if you default on your loan, plus any penalties.
Breaking your mortgage might cost you!
Is it worth refinancing if I’m charged a break fee?
Break fees are designed to help banks recoup the costs they incurred to provide lending, and the money they would have received if you hadn’t broken your fixed term. But they have a fortunate side effect (fortunate for the banks, that is) - they make refinancing during a fixed term more expensive and put lots of borrowers off.
The thing is, there’s nothing stopping you from finding out the exact break cost from your bank, and deducting it from the savings you’ll make from refinancing. Here’s how your calculations might look:
Refinancing cost/benefit =
(Break fees + refinancing costs) - (savings + incentives from new lender)
It’s worth doing your sums, but keep in mind there are limitations to even the most detailed calculations. For example, you might work all this out then after you’ve refinanced your old lender could come up with a market leading rate that’s lower than your new rate. For that reason, it’s usually only worthwhile breaking if it’s clear that you will benefit - not if the numbers are 50/50.
Note: refinancing costs can add up. Keep in mind your current lender may charge fees on top of break costs, your new lender may charge you fees, and a lawyer will most likely charge at least $1,000 to arrange your refinance.
How can I avoid mortgage break fees?
Stick to variable or floating loans
Variable loans typically do not charge break fees, meaning you can pay them off or refinance at any time for free (or close to free). The problem is, floating rates are typically a bit higher than fixed rates, and sometimes that extra flexibility isn’t worth paying more interest for.
Another option to look at if you want to make extra repayments is floating a portion of your mortgage. For example, you could float a $5,000 or $10,000 portion of your loan if you believe you can pay that much extra over a year.
Pay the allowed extra amount
Most banks allow you to pay a bit extra without break fees, even if you have a fixed rate. For example, Kiwibank lets customers with fixed rates pay an extra 5% of their current loan amount as a lump sum each year (as long as the sum is over $1,000). Other banks (like ANZ) also allow regular extra repayments of around $250 a week.
Make sure you do your sums before you break your mortgage
Pay off chunks at the end of your mortgage term
If you’re good at saving or expect to receive a lump sum and want to pay extra, there’s a simple solution to consider. Just wait until your fixed term ends, at which point it will revert to floating, then pay a lump sum to reduce your loan balance, then refix as soon as you’ve done that.
Plan before you fix
When fixing your mortgage, it’s important that you look past interest rates and consider your plans for the future. For example, if you’re thinking about moving in the next five years it might be a good idea to stick to short term fixes of one or two years. If rates are falling in the market, it may also be a good idea to stick to shorter term fixes so that you don’t miss out on all the savings.
Split your fixed terms
It can be tempting to try and time the market and pick the best interest rate, but even the smartest economists in the country get this wrong often. The problem is, if you don’t nail it you might want to break your mortgage in future. Instead, many mortgage brokers and lenders recommend considering splitting your mortgage into two or more different fixed periods. For example, you might consider splitting your loan into thirds and fixing at one, two and three years - which would mean you benefit from rates if they decrease, but are also somewhat protected if they increase.
Just ask
Most Kiwis don’t think to ask their bank or mortgage broker to waive fees. But if you’re a good, long time customer there’s a chance that they will surprise you and either reduce or eliminate some fees if you simply ask.
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