Understanding Early Repayment Interest


What is early repayment interest?

Early Repayment Interest, which is also referred to as a 'break fee', may be payable if you choose to pay off your fixed rate home loan before the end of the fixed interest rate term. Fixed Loan Prepayment Interest may also be payable if you make voluntary payments of more than 5% of your outstanding loan balance or $10,000  (whichever is the lesser) in a calendar year, or if you to change to a different interest rate or loan type. 


Why is fixed loan early repayment interest charged?

When you take out a fixed rate home loan, you get the certainty of knowing how much the loan repayments will be over the fixed term you choose. If you decide to repay your home loan early, make additional loan repayments, or switch to a different interest rate or loan type (e.g. a lower fixed rate) before the end of the fixed term, the Bank may incur a loss of income. Early Repayment Interest is charged in order to recover this loss of income. 


How is early repayment interest calculated?

The calculation for Early Repayment Interest is based on a number of factors, including:

  • The amount being repaid early
  • Time remaining in the fixed term
  • Current lending rates
  • Contractual principal and interest repayments of the loan. 

Early Repayment Interest is calculated by comparing the interest that would have been payable for the outstanding time remaining on the fixed term interest rate, to the interest that would be payable if the Bank re-lent the money today. If there is a loss of income to the Bank, then Early Repayment Interest will be payable.

To get an approximate estimate of Early Repayment Interest, the following formula can be used:
Early Repayment Interest = (Loan Interest Rate – Current Rate for remaining term) * Loan Balance * Years Remaining of fixed term

For example, John borrowed $250,000 on a 5 year fixed term at 5.75% p.a. After 3 years, John has $200,000 remaining on his home loan balance and repays the amount in full. Fixed Loan Prepayment Interest is calculated on the $200,000 repaid early, at the difference between John’s existing rate (5.75%) and the current lending rate for 2 years (for this example we'll use 5.50% p.a.). This amount is then multiplied by the years remaining in the fixed term (2 years).

Early Repayment Interest = (5.75% - 5.50%) * $200,000 x 2yrs = $1,000

If John had instead decided to make lump sum payment of $100,000, the Early Repayment Interest would be;

Early Repayment Interest = (5.75% - 5.50%) * $100,000 x 2yrs = $500

If the current 2 year lending rate was 6.00% (i.e. higher than John’s existing loan rate) then no Early Repayment Interest would have been charged.

Please note: The above examples are simplified and the actual Early Repayment Interest calculation is very complex. Early Repayment Interest won’t be the same for everyone and will change each day, so we recommend you contact us for a quote before you look to repay or restructure your fixed rate loan. A copy of the actual formula used is available on request.


When is early repayment interest charged?

Early Repayment Interest is charged at the time you pay your outstanding loan balance in full, or at the time you make a voluntary payment that exceeds 5% or $10,000 of your outstanding loan balance (whichever is the lesser) in a calendar year. Early Repayment Interest is also charged if decide to switch to a different interest rate or loan type.


How can I avoid paying early repayment interest?

There are several ways you could avoid paying Early Repayment Interest;

  • You can make additional lump sum payments on your home loan, as long as they do not exceed 5% of your outstanding loan balance or $10,000 (whichever is the lesser) in a calendar year
  • If you're selling your property and buying a new one, you may be able to transfer the fixed rate term to the new property
  • Save any extra money you have and make a lump sum repayment when your fixed term ends
  • If current lending rates are higher than your fixed term rate