What are break costs?

If you’re considering breaking a fixed-rate contract, there will likely be “break fees” involved. But what are they and could it still be worthwhile financially to make the switch?

The “break cost” or “break fee” of a loan is a fee some lenders may charge people who want to end their fixed-rate home loan before the end of the fixed-rate term in the contract. This fee is designed to compensate the financial institution for any loss of profit it faces as a result of a customer breaking the terms of the contract, including administration and its own wholesale borrowing costs. It does not typically apply to other types of loans, such as variable-rate loans.

The break fee amount can vary between customers, as it is calculated according to the conditions of a customer’s loan.