Lenders may now be offering loans at interest rates lower than the fixed rate you are paying. However, when you approach your lender about changing your loan terms, they may tell you that a fee will be payable. Your lender may refer to this as a ‘break fee’, an ‘early exit fee’ or ‘economic cost’.
The information below applies to break fees payable on loans with a fixed-rate period, not to other types of fees and charges.
Frequently asked questions about break fees and COVID-19
- I took out a loan with a fixed interest rate – how can I switch to a loan with a lower interest rate?
- Do I have to pay the break fee?
- Can I complain to AFCA about the break fee?
- Will AFCA make a lender waive break fees?
I took out a loan with a fixed interest rate – how can I switch to a loan with a lower interest rate?
A fixed-rate period in a loan applies where you and the lender have agreed that you will pay interest at a set rate for a certain period of time. For example, a rate of 4% per year for 3 years.
Where a fixed interest rate applies, you and your lender agree on a rate that will apply for the relevant period, regardless of whether the variable interest rate offered by the lender goes up or down. This gives you greater certainty about the repayments you will need to make.
When you agree to a fixed-rate period, you can change to a variable interest rate loan at any time. However, you will usually need to pay the lender a fee if your loan is still in the fixed-rate period.
This fee is called a ‘break fee’ and will be noted in your loan contract.
Do I have to pay the break fee?
If you want to change to a variable interest rate and the lender says there is a break fee, you can ask them to waive or reduce the break fee. However, the lender does not have to agree.
They may insist that you need to pay the break fee if you want to change to a loan with a variable interest rate.
When you enter into a fixed-rate loan, the lender borrows the funds (for your loan) from someone else and has to pay interest on those funds. The interest rate the lender pays to the other party is based on the fixed rate you have agreed to pay on your loan.
If you decide to end the fixed-rate period early and change to a lower interest rate, the lender has to pay extra costs to the other party because the arrangement has changed. The break fee allows the lender to pass on those extra costs to you.
Can I complain to AFCA about the break fee?
If your complaint is just about your lender deciding to charge you a break fee, we may not be able to help you. However, we can consider break fee complaints where you believe:
- the lender misled you about the break fee when you took out the loan
- the break fee is not a reasonable estimate of the additional costs the lender has to pay because you ended the fixed-rate period early
- the lender did not charge the break fee in the way it said it would in the loan contract.
Will AFCA make a lender waive break fees?
If your loan contract states that you have to pay a break fee to end the fixed-rate period early, we will not usually ask the lender to waive the break fee.
This is because the break fee allows the lender to cover its own costs that are caused by your decision to end the fixed-rate period early.
However, we may reduce or vary the break fee if we find:
- the lender misled you about the break fee when you took out the loan; or
- the break fee is not a reasonable estimate of the additional costs the lender has to pay if you end the fixed-rate period early.
The amount of the break fee is not known at the start of the contract because it depends on when you decide to end the fixed-rate period and the interest rate on the new product that you change to.
If the lender has not charged the break fee as set out in the loan contract, we will usually require the lender to follow the terms of the contract.
- AFCA Fact sheet – Breaking a fixed rate loan
- National Debt Helpline: 1800 007 007
- Find a financial counsellor near you
- Australian Banking Association – financial hardship contacts.
If your financial firm is not an ABA member, you could also check with Customer Owned Banking Association (COBA), and for broker contact information, visit MFAA’s Mortgage + Financial Help website.