16 July 2026 - 12 min read

While fixed rate loans can provide certainty around repayments, they often come with restrictions and potential penalties for changing the agreement early. So, if you're considering locking one in – or you're planning to exit your loan before the fixed period expires – it's important to understand how break costs work.

This article explains what break costs are, why lenders charge them, how they calculate them, when they may apply, and what you as a borrower can do to reduce the risk of unexpected fees when managing a loan.

Key take-outs

• A break cost fee may be charged if you end a fixed rate term before the period agreed to or make pre-payments above the agreed threshold.
• The fee helps cover the cost to the lender of obtaining the money for your loan on the wholesale money market.
• There are several reasons break costs may occur – and a number of ways you may be able to avoid them.

Break cost questions answered

• Why are they charged?
• When do they apply?
• How are they calculated?
• How do break cost calculators work?
• How can I get a break cost estimate?
• How can I avoid them if I need to break my fixed term?
• Is it worth paying break costs to refinance a home loan?

1. Why are they charged?

When a bank or financial institution lends you money at a fixed interest rate, they obtain money from the money market at wholesale interest rates, based on you making your payments as agreed until the end of the fixed rate period. If you don’t, and wholesale interest rates change, the lender can make a loss.

Where can you find information on wholesale interest rates?

The wholesale interest rate is commercially sensitive and not displayed publicly. When money is lent at a fixed rate for a fixed term, a lender (bank or financial institution) borrows money from the wholesale money market using a Bank Bill Swap Rate (BBSR), locking in the BBSR at the time they lock in the borrower’s interest rate. There’s no way to predict what the wholesale interest rate will be, and it changes frequently, subject to market conditions. Movement in a lender’s Variable or Fixed rates doesn’t normally form part of the calculation used to establish if a break cost is applicable.

What are some other names for break costs?

At Westpac, we use the term break cost when referring to the fee associated with prepaying over the threshold or switching during a fixed rate period. With other lenders the following terms can also mean the same thing:

• Early repayment adjustment (ERA)
• Early repayment fee (ERF)
• Prepayment fees and economic cost
• Fixed-rate early termination fee
• Fixed-rate unwind adjustment
• Early payment interest adjustment (EPIA)

2. When do they apply?

There are two main scenarios where break costs will be charged:

Prepayment break cost

This fee applies when you:

• Pay off your entire loan early before the end of your fixed rate period
• Pay off part of your fixed rate loan early before the end of your fixed period, with the amount you’re paying off exceeding the prepayment threshold.

Switching break cost

Will apply when you:

• Switch to another product: ie. change the home loan from one lender to another or from one product type to another before your fixed period expires
• Change interest rates: ie. refix to another fixed rate or move to a variable rate before your fixed period expires
• Modify your payment type: ie change from principal and interest repayments to interest only repayments before the end of your fixed rate period.

What other event could trigger break costs?

If you find yourself in default and the total amount owing becomes immediately due for repayment, break costs could apply if the break is combined with a change in wholesale market interest rates during a fixed rate period.

What’s the prepayment threshold?

It’s the maximum amount your lender has specified you can pay as extra repayments into your loan account over the fixed period without triggering a prepayment break cost. At Westpac, the prepayment threshold on fixed rate loans is a maximum of $30,000 over the fixed period.

An example: a 3-year fixed rate period

First year

Customer prepays $26,000 and redraws $12,000

• They don’t exceed the threshold

Second year

Then prepays $8,000 after 1 year and 6 months

• They don’t exceed the threshold as the net prepayment is $22,000

Third year

Then prepays $10,000 after 2 years and 6 months

• They exceed the threshold as the net prepayments is $32,000

Other applicable fees

Sometimes lenders will also charge an administration fee on top of break fees. Westpac does not charge administration fees.

3. How are they calculated?

Our break costs formula is complex. This is a simplified description.

To calculate the amount of break costs, we multiply the difference in wholesale interest rates with the remaining term in your fixed rate period and the loan account balance (if you are prepaying the full loan balance) or any amounts you have prepaid as at each remaining loan repayment date. The amount is then converted to its value in today’s dollars.

What’s the difference in wholesale interest rates?

It is the difference in rates on the day a prepayment or switch is made, where the wholesale interest rate applicable for your remaining fixed rate term is less than the wholesale interest rate applicable when you began your fixed rate period.

How are break costs charged?

Depending on whether you are paying out your loan in full or making additional repayments above the payment threshold, before the end of the fixed rate period, will determine how you'll be charged. At Westpac, the methods of charging customers are as follows:

Paying out in full before the end of the fixed rate period Break cost fee will appear as a separate fee in the final payout figure.

Additional repayments above the accepted prepayment threshold Break fees will automatically be charged to the home loan account.

4. How do break cost calculators work?

A break cost calculator estimates the break costs that could be charged on a fixed rate home loan if a borrower were to make a prepayment (ie. repay ahead of the due date or pay an extra or higher amount above the prepayment threshold) or make a change to another interest rate or product, or another repayment type, that will change the lenders funding position.

Some lenders provide break cost calculators for customers to estimate their break costs. At Westpac, we don’t do that as these ‘do-it-yourself’ calculations can be misleading and provide inaccurate information. Instead, we provide break cost quotes prepared by our specialist home loan team and do not charge additional administration fees for these quotes.

5. How do I request a break cost quote?

You’ll need to contact your lender to provide you with a break cost quote. They will be able to confirm if break fees are applicable on your current fixed rate home loan.

Westpac customers can request a break cost quote by calling 8am-8pm, 7 days a week (Sydney time): 132 558 or you can request a callback.

How long is a break cost quote valid for?

As wholesale interest rates can change daily, break cost quotes are valid only for a fixed period. At Westpac, our quotes are valid for 5 business days from the day they are calculated. If you decide to proceed with breaking your fixed rate home loan, your request needs to be submitted within the 5 business days for the quote to be honoured.

How to figure out exactly when the break cost quote will expire?

If, like at Westpac, the break cost quote is only valid for 5 business days:

Example 1: Break cost is calculated on a Monday the request must be lodged by close of business on Friday of that same week.

Example 2: Break cost is calculated on a Wednesday the request must be lodged by close of business on Tuesday of the following week.

6. How can I avoid them if I need to break my fixed term?

In most cases, if you’re breaking a fixed interest period on your home loan before the end of the fixed term, break costs will apply. Your lender will be able to tell you how much you’ll need to pay. However, you should check with your lender if any loan features exist that you may be able to use to avoid paying them.

At Westpac, customers who have portability as a loan feature could use it, when buying and selling a property during a fixed rate term, to avoid break costs.

What is portability?

Portability or substitution of security, as it is sometimes known, is a loan feature offered by some lenders that enables you to substitute the security you have on your loan for another form. Security on a home loan in most cases is a property, so when you port a loan, you are substituting the property securing the loan for another property. This is particularly handy when buying and selling a property when you'll need a loan on your new purchase as it means you don’t need to close out or discharge your loan when you sell and then reapply for a new loan when you buy. In some cases, you’ll also be able to apply for a loan increase before you port your loan.

Benefits of portability:

• Keep everything about your existing home loan, from the interest rate to repayments, features and setups like direct debit and offset.
• No break costs will apply on a fixed rate loan if you keep your existing limit and balance when substituting security.
• Avoid the hassles of closing and opening a new loan, including mortgage discharge and new loan application fees.
• Porting a loan is a lot faster than having to reapply, you’ll save both on preparation time and the amount of paperwork.

How does portability work at Westpac?

There are two ways that you can use portability as a loan feature when buying and selling property:

• Same time settlement
  This is when you’re buying and selling at the same time, meaning the settlement date for the property you are selling and the settlement date for the property you are buying are aligned.
• Deferred settlement
  With a deferred settlement, the settlement dates of the property you are selling and the property you are buying are not aligned. In this case, the gap between the settlement dates can last up to 6 months (conditions apply), which means in the interim a term deposit will need to be set up to be used as security against the loan.

Portability fully explained

Other solutions

Here are some other options to consider to avoid break costs:

• Available cash above prepayment threshold
  If you’ve extra funds that you’d like to use to reduce your mortgage put the maximum you can which reaches your prepayment threshold into your home loan, but then you might consider placing the rest into an interest-bearing account like a Term Deposit. Once your fixed rate period expires you can then add the extra funds into your loan account without penalty. You could then refix your loan or even consider splitting your home loan if you foresee future cash sums that could exceed your prepayment threshold.
• Separation or divorce
  Some lenders will allow the removal of the name of one of the borrowers in the situation of separation or divorce without the need to pay break costs, but the remaining customer(s) must be able to service the loan. At Westpac, we have a ‘removal of name’ process where a borrower can be removed from the loan without breaking your fixed rate period, and therefore avoiding the fee.

7. Is it worth paying break fees to refinance a home loan?

If you’re thinking of refinancing a fixed rate home loan when it’s still in a fixed rate term, you need to do your homework and look at both sides of the coin. It’s a good idea to make sure before you even think of refinancing that you take a good look at your current loan and the new loan you are thinking of refinancing to. Factors that you may wish to consider:

Your current home loan

The Basics

Interest rate

• Is it variable or fixed?
• What’s the rate?
• If fixed, when does your fixed term end?
• If fixed, what will your break costs be?

Loan period

• How long have you taken the loan out for?
• When does your loan period end and what is the remaining term?

Repayment type

• Are you paying principal and interest or interest only repayments?
• Do you make extra repayments and do you know you can make unlimited extra repayments on a variable loan?

Fees and charges

• What fees are being charged monthly?
• Do you have a home loan package?
• What fees could come into effect if you sell your home?

Loan Features & Extras

What features does your loan offer and are you using them to your best advantage?

• Portability
• Offset
• Redraw
• Direct Debit
• Repayment pauses
• Support
• Packaging your loan to save

The new lender's loan

The Basics

Interest rate

• Is it variable or fixed?
• What’s the rate?
• If fixed, are there options to choose from? Westpac offers fixed terms from 1 up to 5 years.

Loan period

• How long have you taken the loan out for?
• If you’re extending your loan term, remember you’ll lose all the gains you’ve made with your old loan.

Repayment type

• Can you choose between principal and interest or interest only repayments?
• Can you make extra repayments without penalty?

Fees and charges

• What fees are being charged monthly?
• Are there options to package the loan to reduce fees?
• What fees could come into effect if you sell your home?

Loan Features & Extras

• You never know when you might need to use a loan feature. The nature of unexpected events is that they are unpredictable, and you don’t know when they will happen. Having the flexibility to call upon loan features that come standard could be the difference between keeping and losing your home. Make sure you understand the loan features.

What does it cost to refinance your home loan?

When refinancing to another lender you have to take into consideration not only the differences between the loans but also the costs, in both time and money. It’s always a good idea to seek independent financial advice to ensure the lending criteria, other credit products, disclosure documents and entire loan package meet your personal objectives.

By refinancing, you could be hit with:

• Mortgage discharge fees
• New loan application fees
• Break costs on a fixed loan.

It can be a real hassle to refinance:

• Applications and assessments
• Valuations and financial checks
• Loan approval and settlement.

The real costs explained