EXIT FEES: HOW THEY AFFECT YOUR HOME LOAN

SEARCH EXIT FEES FOR YOUR LENDER!

Buying a home is generally a satisfying experience until, that is, you get the urge to move on. If this happens sooner rather than later during the contracted mortgage term, it can cost you big time.

Here's a breakdown of what fees you could be up for, should you decide to sell, move or refinance.

Exit Fees

Early Termination Fees

May or may not be charged, depending on how long you have had the loan. This fee typically applies for the first five years from the settlement day.

Break Costs (only applicable for fixed rate loans)

May or may not be charged, depending on current interest rate situation relative to original interest rate at the time you took out the loan.

Other Fees

These include discharge fee, administration fee and any other fees associated with closing your loan.

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What are exit fees?

Exit fees on a variable rate home loan usually consist of two components: early termination fees and a category we will call ‘Other fees’. Early termination fees, which are not always charged, are also known as deferred establishment fees, deferred admin fees or early repayment fees. These should not be confused with those fees in the ‘others’ category - discharge fees can apply if you pay out a variable rate loan at any time before the contract is up, say, at year 21 of a 25-year loan.

As you can see, it is easy to be tricked by terminology, as each bank uses different names for their schedule of fees.

What are break costs?

The dollar amount owed to the bank if you pay out a fixed-interest home loan before the term is up is called a break cost. Break costs may or may not be charged depending on interest rate movements at the time.

Why are early termination fees charged?

Early termination fees are charged by the banks to discourage borrowers from ‘loan hopping’ and to recoup the cost of establishing the mortgage.

When do early termination fees apply?

Some home loans have zero exit fees but the majority range from the first one to five years of a mortgage.

How are early termination fees calculated?

There are three methods commonly used by banks to calculate early termination fees on variable rate loans:

A percentage of the initial amount borrowed.
A dollar figure.
Pre-determined extra monthly repayments.

When do break costs apply?

As a general rule, the longer the time remaining on your fixed loan, the larger the break cost will be. If the current interest rate is higher than the rate you locked in, it's likely you won’t be charged a break cost. On the other hand, if the current interest rate has fallen below what you are paying, you may be charged the difference multiplied by the outstanding balance multiplied by the years remaining in the fixed term. This can add up to thousands of dollars.

How are break costs calculated?

It's complex but essentially based on three factors with a fixed-rate loan:

What interest rate you locked into, compared to the current market interest rate.
What length of time remains on your fixed-rate term.
The loan amount you initially borrowed.

Why do exit fees and break costs matter?

The days of staying in the same house for 25 years are long gone. These days, statistics tell us the average life of a mortgage is only 4 years. There are many reasons for a mortgage to be repaid early, including:

Trading up to a bigger, better house as the family grows
Selling to go overseas
Moving interstate with your job
Refinancing to a cheaper mortgage
A change in your financial circumstances, eg. divorce
Accepting a lucrative real estate offer

Taking no notice of exit fees on your variable rate loan or break costs on your fixed rate loan can result in a nasty surprise when you sell and discover you have to repay thousands more dollars than you anticipated.

Can I avoid exit fees and break costs?

Yes you can. The easiest way to avoid early termination fees is by planning well before you sign up for a variable rate home loan. Ask yourself how long you truthfully intend to own the property for. Will you move or refinance in, say, the first 5 years?

If there is the slightest chance that the answer is yes, you need to look seriously at early termination fees associated with home loan products. Sometimes, a variable rate loan with a slightly higher interest rate but no exit fees can work out much cheaper if you repay early. You can avoid break costs on a fixed loan simply by being aware that this cost is likely to be charged if you pay out the loan when current variable rates are lower than what you are paying on the fixed loan.

How can I compare early termination fees?

We have prepared a table that clearly documents each standard variable rate home loan product with the early termination fees that apply. We have used a borrowed amount of $250,000 over 25 years to keep the comparison balanced. Click here to compare exit fees on variable rate home loans offered by different financial institutions. After compiling a short list of loans to investigate further, we suggest you ask the banks in question about their policy on the application of these fees.

How can I compare break costs?

You can't. There are so many variables involved it is difficult for us to give you an accurate idea of break costs. The daily movement of wholesale interest rates make our calculations unreliable. This is particularly evident with the wild fluctuations we are seeing in the financial markets at the present time.

However, the following hypothetical will give you an idea.

Fred borrowed $250,000 on a 3-year fixed rate loan 6 months ago. The fixed rate was 9% and, at the time, the money market rate for a 3-year fixed loan was 7.44%.
Fred now wants to refinance, with two and a half years to go on the loan. The money market rate for a 2.5 year fixed loan has now dropped to 5.55%.
The total break cost is $10,300, based on the outstanding balance and the current money market rate.

Before rushing to refinance to take advantage of low interest rates, think about the effect break costs could have on the time it takes to profit from a lower interest rate. The time to talk break costs is before you sign up for the loan. Ask your lender to explain the ramifications under a range of different scenarios.

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EXIT FEES: HOW THEY AFFECT YOUR HOME LOAN

SEARCH EXIT FEES FOR YOUR LENDER!

Early Termination Fees

Break Costs (only applicable for fixed rate loans)

Other Fees

What are exit fees?

What are break costs?

Why are early termination fees charged?

When do early termination fees apply?

How are early termination fees calculated?

When do break costs apply?

How are break costs calculated?

Why do exit fees and break costs matter?

Can I avoid exit fees and break costs?

How can I compare early termination fees?

How can I compare break costs?

Special types of home loan

Star Ratings Library

Visit the Star Ratings Library!

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First Home Owner - Five-step guide to owning your first home

Exit Fees - How they affect your home loan

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Rent or Buy? The Great Housing Dilemma!