Definition
Break costs are charges a lender may apply when a fixed-rate loan is repaid, switched or changed before the fixed period ends. They reflect the lender's cost of unwinding the funding arranged for the fixed term and depend on market conditions and the time remaining. Break costs can be significant, so ask how they are calculated before fixing.
Fixing the price of a loan gives certainty. Break costs are the other side of that bargain.
Why they exist
When a lender fixes your price for several years, it arranges funding to match. If you repay early, the lender may lose money unwinding that arrangement, depending on how market conditions have changed. Break costs pass that loss to the borrower.
How big can they be?
That depends on how much time is left in the fixed period, the balance and how market pricing has moved. They can be small or substantial. Ask for an estimate before acting.
Before you fix
If you might repay early, sell an asset or refinance during the fixed period, think carefully about fixing, or fix only part of the loan. Our guide to fixed versus variable pricing explains the trade-offs. For options that fit your plans, make one enquiry.
Common questions
Are break costs always charged?
Not always. They usually apply only to fixed-rate periods and depend on how market rates have moved since the loan was fixed.
Can I estimate break costs in advance?
Lenders can usually provide an estimate on request. Ask for one before deciding to repay or refinance.
Sources and further reading