# Breaking a fixed-rate home loan: how break costs are worked out
Selling, refinancing or repaying a fixed home loan early can trigger a break cost. How lenders calculate it, why it is often nil after rates rise, and what the law allows.
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A fixed rate is a promise that runs both ways. The borrower knows the repayment for one, two or three years, and the lender knows the interest it will receive. When the borrower ends that promise early, by selling the home, moving to another lender or paying the loan down faster than the contract allows, the lender is entitled to ask whether it has lost money, and to pass a genuine loss on. That charge is the break cost.
It is the least predictable fee in home lending. It can be nothing at all, or it can run to tens of thousands of dollars. The amount does not depend on the borrower's reasons or on the lender's advertised rates. It depends on what has happened in the wholesale money market since the day the rate was fixed.
This guide explains what counts as a break, where the cost comes from, how the arithmetic works in a rising market and a falling one, why nobody can state the figure in advance, and what the law says a lender may and may not charge. It also covers the sale of a Queensland home with a fixed loan. It describes how the system works; it does not say whether any borrower should fix, break or stay.
4.60%cash rate target since 29 September 2026
$10,000median yearly extra repayment allowance, large lenders
2011year exit fees were banned on new loans
Reserve Bank of Australia decision of 29 September 2026; Reserve Bank Bulletin, March 2023 (loans advertised in December 2022); ASIC Regulatory Guide 220.
## One charge, four names
Lenders do not agree on what to call it. Westpac's home loan pages say "break cost". Commonwealth Bank calls it an "early repayment adjustment". NAB uses "economic cost", and ANZ "early repayment cost". ASIC's Moneysmart site and the regulator's own guidance say "break fee". They all describe the same thing: an amount charged when a fixed-rate loan, or part of one, ends before the fixed period does.
ASIC's Regulatory Guide 220 gives the cleanest definition. A break fee, it says, is meant to recover the lender's economic loss when a fixed-rate loan is terminated before the end of its fixed term, and it does not arise on a variable-rate loan. A borrower with a split loan has a break cost question on the fixed portion only.
The charge is separate from two others that often appear on the same payout letter. A discharge fee is the administrative fee for closing any loan and releasing the mortgage, fixed or variable. And some lenders add an administrative fee for processing a break: Commonwealth Bank's fact sheet says its fee applies to any break, even when the adjustment itself is nil, while Westpac says it charges no administration fee on top of its break cost.
## What counts as breaking the loan
The lenders' published fact sheets list much the same events. Read together, those of the four major banks describe a break as any of the following during the fixed period:
- repaying the whole loan, which is what happens when the property is sold or the loan is refinanced to another lender;
- switching to a variable rate, or to a different fixed rate, before the term ends;
- making extra repayments above the allowance in the contract;
- changing the loan in certain other ways, such as topping it up, changing the fixed term or moving to interest-only repayments.
One trigger is not chosen by the borrower at all. Westpac's page notes that if the whole debt becomes due because of a default, and wholesale rates have moved during the fixed period, a break cost may apply then too.
The Reserve Bank's March 2023 Bulletin article on fixed-rate housing loans found that most Australian borrowers who fix do so for three years or less, so for most people the question is live for a short, known window. Once the fixed period ends, the break cost disappears with it.
## How much extra can be repaid without a break
A fixed loan is not completely closed to extra repayments. Most lenders allow a limited amount, and the Reserve Bank's 2023 article put a number on it: among the ten largest lenders, the median allowance was $10,000 for each year of the fixed term, based on loans advertised in December 2022.
The allowances are not uniform, and the way they are measured differs as much as the amounts. In the major banks' current fact sheets, one bank allows $10,000 in each year of the fixed term, counting each year from the date the rate was fixed. Another allows the lesser of $5,000 or 5% of the loan amount at the start of the fixed period, each year. A third allows $20,000 over the fixed period, and a fourth sets a threshold of $30,000 over the whole fixed period, with redraws reducing the net amount counted.
Westpac's page gives an example of how a whole-of-term threshold fills up. A borrower on a three-year fixed term prepays a net $14,000 in the first year, a further $8,000 in the second and a further $10,000 in the third. The total is then $32,000, over the $30,000 threshold, and a break cost can apply. The test is cumulative: the repayment that triggers the charge may be a small one.
The limits and the counting rules sit in each loan contract, which is the only reliable place to find them.
## Why the lender has a loss to recover
When a borrower fixes, the lender arranges matching funding in the wholesale money market, locking in its own cost for the same period. Commonwealth Bank's fact sheet says the bank still owes that commitment for the rest of the term if the borrower leaves. ANZ's says the bank hedges and funds the loan on the basis of the contract, and that an early exit forces it to change those arrangements.
The reference point for that cost is the swap rate, a wholesale fixed rate for a given term. Commonwealth Bank's fact sheet describes it in plain terms as the rate at which banks lend to each other. The Australian Financial Complaints Authority, in its factsheet on breaking a fixed-rate loan, says that when it checks a lender's figure it uses the swap rates published in the financial press for terms of one to five years.
The loss arises from a gap between two of these rates. Suppose a lender funded a three-year fixed loan when the three-year wholesale rate was 4%. A year later the borrower repays. The lender gets its money back with two years of its funding commitment still to run, and it must put that money to work at today's two-year wholesale rate. If that rate is now 3%, the lender earns one percentage point less than it is paying, on the amount repaid, for two years. That shortfall is the loss.
If today's rate is higher than the original one, there is no shortfall. The lender can relend the money at more than its locked-in cost.
Westpac's fact sheet adds that movements in the bank's own advertised rates are not part of the calculation, and that its wholesale rates exclude the customer margin and are not published. A borrower cannot work out a break cost by comparing the rate on the loan with the rates in a lender's window.
## The formula in plain terms
Every lender's fact sheet reduces to the same three inputs: the amount being repaid early, the time left in the fixed period, and the change in the wholesale rate since the loan was fixed. Commonwealth Bank sets the method out in steps, and the other banks describe the same sequence in other words.
How a break cost is built
Compare two wholesale ratesThe rate for the original term on the day the loan was fixed, against the rate today for the time that is left.
Multiply out the shortfallIf today's rate is lower, the difference is applied to the amount repaid early for the remaining fixed period.
Bring it back to today's dollarsThe result is discounted, because the lender is paid now for a loss it would have borne over time.
The comparison in the first step is not like for like in term. AFCA's factsheet gives the example of a five-year fixed loan repaid after two years: the original five-year rate is compared with the current three-year rate, because three years is what remains.
The bank fact sheets also show how much the discounting changes the answer. In Commonwealth Bank's published example, a borrower with a balance of $387,208 and three years left faces a wholesale rate two percentage points lower than when she fixed. The simple multiplication gives $387,208 × 3 × 2% = $23,232.48, and the present-value adjustment brings it down to $21,504.91. ANZ's fact sheet carries a reference table per $100,000 repaid: with a two-point difference, the indicated cost is $1,957 with 12 months left and $9,050 with 60 months left, where simple multiplication would give $2,000 and $10,000. The simple version therefore overstates the charge a little, and by more as the remaining term grows.
## A worked example: rates fallen, rates risen
The figures below are illustrative, not market data and not any lender's rates. They use the simple multiplication, before discounting, so a real quote on the same facts would come in somewhat lower.
The assumptions: a loan was fixed for three years. One year in, the borrower sells and repays the balance of $480,000, with two years of the fixed period left.
**Case one, rates have fallen.** The three-year wholesale rate was 4.00% on the day the loan was fixed. The two-year wholesale rate on the day of repayment is 3.00%. The difference is 1.00 percentage point. The simple break cost is $480,000 × 2 years × 1.00% = $9,600.
**Case two, rates have risen.** The three-year wholesale rate was 3.50% when the loan was fixed. The two-year wholesale rate on the day of repayment is 4.50%. The lender can relend the $480,000 at one point more than its locked-in cost, so it has no loss, and the break cost is nil. The borrower is not paid the difference: the fact sheets describe a cost that applies only when wholesale rates have dropped.
The table extends case one to show how the two moving parts, the size of the fall and the time left, drive the figure.
Simple break cost on $480,000 repaid earlyBefore discounting, by fall in the wholesale rate and fixed time left
Wholesale rate since fixing
1 year left
2 years left
3 years left
Risen or unchanged
Nil
Nil
Nil
Fallen 0.50 points
$2,400
$4,800
$7,200
Fallen 1.00 point
$4,800
$9,600
$14,400
Fallen 2.00 points
$9,600
$19,200
$28,800
Illustrative figures: amount × years left × fall in rate. Not market data and not a quote; a lender's discounted figure would be lower.
The largest break costs belong to long fixed terms broken early after a sharp fall in rates, and ASIC's guide warns that break fees can be substantial, with some reaching tens of thousands of dollars.
## Why the cost is often small or nil in October 2026
The direction of rates since a loan was fixed decides almost everything, and in 2026 the direction has been up. The Reserve Bank's Monetary Policy Board raised the cash rate target by 25 basis points to 4.60% on 29 September 2026. Commonwealth Bank's newsroom report of the decision describes it as the fourth increase of the year, following three that totalled 75 basis points, which means the cash rate began 2026 at 3.60%.
A borrower who fixed before or early in that run did so when the lender's funding cost was, in most cases, lower than it is now. That borrower sits in case two of the worked example. ASIC's Regulatory Guide 220 makes the same general point: where the fixed rate is below the prevailing rate, the break fee is usually lower or nil.
Three cautions keep this from being a rule.
First, the cash rate is not the rate in the formula. The formula uses wholesale fixed rates for a term of years, which are not the cash rate and do not move in lockstep with it.
Second, the comparison is with the rate for the remaining term, not the original one.
Third, a nil break cost is not a nil bill. An administrative fee for the break, where the lender charges one, and the discharge fee still apply.
> A break cost looks backwards. It measures the market against the day the rate was fixed, not against the borrower's reasons for leaving.
## Why nobody can give the figure in advance
A loan contract explains the method. It cannot state the amount, because one input, today's wholesale rate, does not exist until today. NAB's page says the cost of funds changes each day. ANZ's fact sheet says the actual cost is set on the day the early repayment happens, and that any quote before then is an estimate.
The only way to get a figure is to ask the lender for a quote, by phone, through its messaging service, at a branch or through the broker who arranged the loan. Westpac says it does not offer a self-service calculator because it considers such tools potentially misleading.
Worth knowing
A break cost quote has a very short life
Commonwealth Bank's fact sheet says its quote is valid only for the day it is issued. Westpac's is valid for five business days: a quote worked out on a Monday must be acted on by close of business that Friday. A new quote after that can differ from the first.
AFCA's factsheet encourages borrowers to ask for quotes regularly while they are deciding, because the figure can change significantly from one day to the next.
## What the law allows a lender to charge
Many borrowers believe exit fees were abolished. That is half right. ASIC's Regulatory Guide 220, "Early termination fees for residential loans: unconscionable fees and unfair contract terms", was reissued on 9 November 2023 and remains the regulator's published guidance. It explains that the National Credit Regulations prohibit early termination fees on loans secured over residential property where the credit contract was entered into on or after 1 July 2011. Fees such as deferred establishment fees, charged simply because a loan ended in its first years, fall within that ban.
Break fees on fixed-rate loans do not. The guide states that the ban does not cover break fees or standard discharge fees. A break fee is permitted because it is meant to recover a loss, not to penalise leaving.
That purpose is also its legal limit. Under section 78 of the National Credit Code, as the guide explains it, a fee payable on early termination is unconscionable if it exceeds a reasonable estimate of the lender's loss arising from the early termination, including the lender's average reasonable administrative costs. A court can annul or reduce such a fee, and either the borrower or ASIC can ask it to. The guide adds that lost profits and marketing costs should not be recovered through a break fee.
A second layer comes from the unfair contract terms provisions of the ASIC Act. A term is unfair if it causes a significant imbalance between the parties, is not reasonably necessary to protect the lender's legitimate interests and would cause detriment. An unfair term is void, and the guide notes that penalties have also been available since 9 November 2023.
The guide also sets expectations on disclosure: a break fee should be explained clearly, with the calculation method, a prominent warning about how large it can be and worked examples where they are not misleading.
One document that will not answer the question is the key facts sheet. Moneysmart describes it as compulsory, laid out identically by every lender, and built for comparing the interest rate, the comparison rate, the total to be repaid, the repayment and the establishment and ongoing fees. A cost that cannot be known in advance has no line on it, which is why Moneysmart lists "are there break costs if I repay the loan early or refinance?" among the questions to put to a lender or broker directly.
## Selling a Queensland home while the rate is fixed
A sale is the most common reason a fixed loan ends early, because the buyer must receive a title free of the seller's mortgage, and the lender releases it only when the debt is repaid. A fixed rate adds one more figure to the payout, and one that moves.
The timing follows from how the charge is set. The break cost is calculated on the day of repayment, which for a sale is the settlement date. The quote a seller obtains when the contract is signed is an estimate, and the amount in the lender's final payout figure, prepared for settlement, is the one that counts. A settlement that is extended changes the remaining term slightly and exposes the figure to further market movement.
There is one way to sell without breaking. Many lenders offer portability, also called substitution of security: the loan stays in place, with its fixed rate and its remaining term, and the mortgage moves from the home being sold to the home being bought. Westpac's page describes it as a way to avoid break costs for a borrower who is buying and selling, provided the existing balance and limit are kept. It adds that where the purchase settles after the sale, a delay it permits for up to six months subject to conditions, the lender may need a term deposit as security in the meantime.
Whether portability is available, and on what conditions, is set by the contract and the lender's policy.
Refinancing has no such route. Moneysmart's page on switching home loans lists the break fee beside the discharge fee and the new lender's application fee among the costs to count before deciding.
## Rate lock fees, tax and disputes
**Rate lock.** A rate lock sits at the other end of a fixed loan's life but belongs to the same logic. Fixed rates can change between application and settlement, and a rate lock is a fee paid to hold the rate on offer. Lenders publish their own terms. Bank of Melbourne's page describes a lock of up to 90 days for 0.15% of the loan amount, with a $500 minimum and a $1,000 cap on loans up to $2 million. Bank Australia's describes 90 days for 0.10% of the fixed amount or $50, whichever is higher, so $300 on a $300,000 fixed loan. Both say that if the lender's fixed rate falls before settlement, the lower rate applies. These are examples of how the fee is structured, not a survey of the market.
**Tax on a rental property.** For an owner-occupied home a break cost is a private expense. For a rental property the Australian Taxation Office treats it differently. Its guidance on rental expenses describes "penalty interest", an amount paid to a lender to accept early repayment, as deductible as a mortgage discharge expense where the loan is secured by a mortgage over the rental property and the payment discharges that mortgage, or where the payment is made to end a recurring obligation to pay interest. The deduction is limited to the extent the borrowed money was used to produce assessable income, so a property rented for half the period it was held supports half the claim.
Taxation Ruling TR 2019/2 sets out the reasoning. When a rental property is sold and the mortgage repaid, the ruling treats the penalty interest as a capital cost of the sale under the general deduction rule, but as deductible all the same under the specific provision for mortgage discharge expenses. It is not a borrowing expense, because it is incurred after the money was borrowed. How these rules meet a particular investor's facts is a matter for a registered tax agent.
**Hardship.** A break cost can also arise when a borrower in difficulty sells to clear the debt. Moneysmart directs borrowers who are struggling with repayments to its material on problems paying a mortgage, and RG 220's test applies whatever the reason for the break: the fee may recover the loss and no more.
**Disputes.** A borrower who thinks a break cost was wrongly charged complains to the lender first and, if that fails, to the Australian Financial Complaints Authority, whose service is free. Its factsheet is frank about what it will examine. AFCA generally does not review the level of a fee as such. It looks at whether the break cost was properly disclosed, whether it was charged in line with the contract, and, for loans under the National Credit Code, whether it is more than a reasonable estimate of the lender's loss, which AFCA tests by making its own estimate from published swap rates. Paying the fee does not close the door: where AFCA finds a break cost was charged incorrectly, it must be refunded.