Break Costs on Fixed Loans: How They Are Calculated

Key takeaways

• Break costs depend on the movement in wholesale swap rates, not on the lender's advertised rates.
• Rough size = loan balance × rate movement × remaining fixed years.
• On $500,000 with three years left and a 1% adverse move, the cost is in the order of $15,000.
• Breaking to refinance after rates have risen — as through 2026 — is often far cheaper than borrowers expect.

How is the calculation built?

When you fix, the lender effectively secures funding at a matching fixed rate for the same term. If you exit early, that funding arrangement remains but the income stream stops.

The approximation lenders use is:

Break cost ≈ outstanding balance × (rate at fixing − current equivalent rate) × remaining fixed term in years

Most lenders then discount that to present value. The number can only be calculated on the day you break, because the market moves daily.

A worked example

You fixed $500,000 for five years. Three years remain. Wholesale rates for a three-year term have fallen 1.0 percentage point since you fixed.

• Annual shortfall: $500,000 × 1.0% = $5,000
• Over three remaining years: $15,000
• Discounted to present value: roughly $14,000

Now reverse it. If wholesale rates have risen 1.0 point instead, the lender can re-lend at a higher rate, so there is no loss to recover and the break cost is typically nil — you may pay only a small administrative fee.

What does this mean in 2026?

Three cash rate increases through 2026 have pushed rates up across the curve. Borrowers who fixed in 2024 or 2025 at lower rates are in the unusual position of holding a below-market fixed loan — breaking it would generally cost little, but there is also little reason to.

The group facing the real decision is those rolling off 2023 fixed loans. They are not paying break costs; they are meeting the revert rate, which is frequently well above the sharpest available pricing. Start shopping about eight weeks before the fixed term ends.

Frequently asked questions

Can I get a break cost quote before deciding?

Yes, and you should. Lenders will provide an indicative figure, usually valid for that day only. Ask for it in writing along with the assumptions used.

Do break costs apply if I sell the property?

Yes. The trigger is early repayment of the fixed loan, whatever the reason — sale, refinance or a lump sum above the permitted limit.

Are break costs capped?

For regulated consumer credit, the amount must be a reasonable estimate of the lender's loss rather than an arbitrary penalty. If you believe a charge is excessive, you can dispute it with the lender and escalate to AFCA.

Related reading

• Fixed vs Variable in a Hiking Cycle: The 2026 Decision Framework
• Refinancing in a Rising Market: When It Still Pays
• Why Home Loan Applications Get Declined: The Top 12 Reasons

Sources

• Fixed rate loans and break fees — ASIC Moneysmart
• Complaints about fees and charges — Australian Financial Complaints Authority