Break fees explained: what it costs to leave a fixed rate early

What is a break fee?

When you fix a mortgage rate, you agree to keep that rate for a set period. Repaying all or part of the loan, switching rates or moving lenders before the fixed period ends may trigger an early repayment charge. Some lenders call this a break fee or an early repayment adjustment. An administration charge may be separate.

Consumer Protection explains that a lender can recover costs or losses from an early exit where the contract allows it. The lender cannot use the break fee to make a profit. Your own loan agreement determines the applicable terms.

A fee can also arise when you increase regular repayments or make a large one-off payment during a fixed term. Lenders have different fee-free allowances, so check the rules for your loan before paying extra.

What affects the amount?

• Amount affected: A full repayment generally exposes more of the loan than a smaller extra payment.
• Time remaining: A break with many months left can cost more than one near the fixed-term expiry.
• Wholesale rates: Lenders compare relevant funding or hedging rates now with those when you fixed. If they have fallen, the lender may incur a loss.
• Your contract: Each lender has its own calculation method and repayment allowances. There may also be administration or discharge fees.

BNZ identifies the first three factors in its explanation of early repayment charges. ASB also advises borrowers to get a current adjustment quote before changing a fixed loan. If wholesale rates have risen, an interest-loss component may be zero, but check whether other contractual charges still apply.

A worked example: does switching save money?

Suppose you owe $400,000 with 12 months left on a fixed term. You are offered a new rate 1.20 percentage points lower. Your current lender quotes a $3,500 break fee and $100 administration fee for your intended switch date.

This $1,200 is not a guaranteed saving. A real loan balance falls as you repay principal; rates, payment timing and any new loan terms change the result. If you move lenders, add legal, valuation, discharge and any cashback repayment costs. Ask for a comparison over the same remaining 12 months, plus the effect on total interest if the new loan term changes.

The fee itself cannot be reliably estimated from the 1.20-point retail rate difference. For a separate example of an actual lender method, BNZ's published illustration shows about $615 on a $123,000 early repayment with six months left and a one-point fall in the relevant wholesale rate. That figure is specific to its example, not a quote for your loan.

Compare more than the new rate

Ask your adviser or lender to put three choices side by side: keep your current fix until expiry, change the rate with your existing lender, and refinance elsewhere. Include every one-off cost, repayment amount, remaining fixed-term interest, new fixed-term expiry and any change to the total loan term.

If you are selling and buying another home, ask whether your lender can transfer the loan to the new property, subject to its conditions. If you expect a lump sum, check whether it fits within your lender's fee-free extra repayment allowance or could wait until the fixed period ends. Neither option is automatically suitable, but both can change the calculation.

Get these figures before you act

1. Ask each lender for a written rate offer, the repayment amount and the date the offer expires.
2. Get a written break-fee quote for your intended settlement or switch date, and ask when that quote expires.
3. Check administration, discharge, legal, valuation and cashback repayment costs, where relevant.
4. Compare the net cost over the remaining fixed period and the longer-term impact of any new loan term.

Break-fee quotes can change as wholesale rates and dates change. If the figure looks wrong, ask the lender to explain its calculation and your contract terms before proceeding.