A fixed rate home loan carries costs beyond the stated interest rate, and the largest of these usually arises only if the loan is repaid or varied during the fixed term.
This article sets out the principal fees and charges associated with a fixed interest rate home loan. It is intended for ACT borrowers who are deciding whether to fix all, part or none of their loan. Fee schedules differ between lenders, so the product disclosure documents for each loan should be reviewed before a decision is made.
What Fees Apply to a Fixed Rate Home Loan?
A fixed rate home loan may attract an application fee, a valuation fee, an ongoing annual or monthly package fee, and a discharge fee, depending on the lender and product. Some lenders waive certain fees, while others apply them to every loan.
The fixed interest rate itself is also a cost. The point at which the fixed rate is set depends on the lender and product. It may be set at application, at approval or at settlement, or it may be locked for a fee. Confirm in writing which applies and whether the rate can change before settlement. Where a lender offers a rate lock, a fee may apply and the terms may specify what occurs if settlement is delayed.
Fees should be assessed in total across the intended life of the loan. A lower rate combined with a package fee may cost more over the fixed term than a marginally higher rate with no ongoing fee. A comparison of home loan rates should therefore include every recurring and one-off charge. A broker can assist with this comparison across lenders on the panel. Further information on available structures is provided on our home loans page.
How Are Fixed Rate Break Costs Calculated?
Break costs, sometimes called economic costs, are charged when a fixed rate loan is repaid early or restructured during the fixed term. The amount generally depends on the remaining fixed term, the loan balance affected and the movement in the relevant funding rate since the loan was fixed.
Lenders use different methods, and the formula appears in the loan contract. The following is an illustrative simplification only. Consider a borrower with a three-year fixed rate loan at 6.75% p.a. who sells the property after 18 months, with a balance of $480,000 and 18 months of the fixed term remaining. If the lender's relevant benchmark rate has fallen by 1.00 percentage point since the rate was fixed, a simplified estimate is $480,000 multiplied by 1.00% multiplied by 1.5 years, which equals $7,200. Lender-specific adjustments and administration fees would then be added or applied.
Before listing the property, a borrower in this position should ask the lender for a written break cost estimate. The estimate allows the cost to be included in the sale budget and can inform decisions about settlement timing. Had the benchmark rate risen instead, the break cost might have been low or nil, as lenders differ in how they treat that outcome. The result cannot be predicted at the time of fixing, which is the principal risk of the product.
Restrictions on Extra Repayments and Offset Accounts
Many fixed rate home loans limit extra repayments during the fixed term, and some do not offer a linked offset account. Where a lender permits additional repayments above the limit, a break cost may be charged on the excess.
These restrictions bear directly on borrowers who intend to reduce their loan amount ahead of schedule. A variable rate loan with a mortgage offset typically allows funds to be held against the balance and withdrawn without penalty. A fixed loan may offer neither feature, or may offer only a capped version. Borrowers who expect bonuses, asset sales or irregular income should confirm the permitted annual extra repayment amount before committing.
The trade-off is plain. Certainty of the repayment amount is gained, while flexibility is reduced. This should be weighed against the borrower's expected cash flow over the fixed period.
Calculating Home Loan Repayments Under a Fixed Rate
Repayments on a fixed rate loan are calculated using the loan amount, the fixed interest rate and the remaining loan term. For an illustrative principal and interest loan of $500,000 over 30 years at 6.75% p.a., the monthly repayment is approximately $3,243.
The figure is illustrative and is not an offer of credit. It holds only for the fixed period. When the fixed term ends, the loan typically reverts to the lender's variable rate unless a new fixed rate is selected, and the repayment will be recalculated on the balance then outstanding over the remaining term. An interest only period, where offered, would result in lower initial repayments but higher repayments later, because the principal must then be repaid over a shorter period.
Borrowers are encouraged to use a repayment calculator and to assess the repayment against their borrowing capacity before applying. Lenders also apply their own assessment buffers, so the amount a lender will approve may differ from the amount a borrower is comfortable repaying.
Is a Split Rate Loan a Way to Limit Fixed Rate Exposure?
A split rate loan divides the loan amount into a fixed portion and a variable portion, which limits the amount exposed to break costs while retaining some repayment certainty. It does not remove either risk.
The fixed portion remains subject to break costs and extra repayment limits. The variable portion remains exposed to changes in the lender's variable rate, although it may be linked to an offset account. The proportion chosen, for example half fixed and half variable, should reflect the borrower's tolerance for repayment movement and the likelihood of selling, refinancing or making large lump sum repayments within the fixed term. Some lenders also charge a separate fee for each loan split.
Planning for the End of the Fixed Term
A borrower approaching the end of a fixed term should review the loan several months in advance, because the lender's revert rate may differ from the rates available elsewhere. Our fixed rate expiry page outlines the options available at that point.
One option is refinancing to a different lender. Refinancing may involve discharge and application fees, and the lender will reassess the borrower's circumstances. A loan health check can establish whether the current loan remains suitable, whether a rate discount is available on request, and whether the fixed term can be renewed without penalty.
Borrowers should not rely on this article as personal advice. It does not take into account individual objectives, financial situations or needs, and the terms of any loan are determined by the relevant lender.
To discuss the fees and costs of a fixed rate home loan, call one of our Canberra-based team or book an appointment at a time that works for you.
Frequently Asked Questions
What fees can apply to a fixed rate home loan?
Fees may include application, valuation, package and discharge fees, depending on the lender. A rate lock fee may also apply where the lender offers one. Total costs should be compared across the intended fixed term.
What is a break cost on a fixed rate loan?
A break cost is a charge that may apply when a fixed rate loan is repaid or restructured before the fixed term ends. It generally reflects the remaining term, the balance affected and movements in the lender's funding rate. The formula is set out in the loan contract.
Can extra repayments be made on a fixed rate loan?
Many lenders cap extra repayments during the fixed term, and amounts above the cap may attract a break cost. Some fixed loans also do not offer an offset account. The loan documents should be checked before committing.
Does a split rate loan remove fixed rate risk?
No. A split rate loan reduces the portion exposed to break costs, but the fixed portion remains subject to them. The variable portion remains exposed to changes in the lender's variable rate.
