What is a break cost?

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 break costs charged?

When a bank or financial institution lends you money at a fixed interest rate, they obtain money from the wholesale money market and lock in a wholesale interest rate, 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 could make a loss. Therefore, a fee is charged to help compensate the lender for the actual loss incurred.

What are some other names for break costs?

At Westpac, we use the term 'break cost' when referring to the fee associated with making repayments over the threshold (see later) or switching loans during a fixed-rate period. But you may come across these other terms:
 

• 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)

Some lenders (not Westpac) may also charge an administration fee on top of break fees.

2. When do break costs apply?

The three main scenarios where break costs may be charged are:

1. Pre-payment break cost, if you:

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

2. Switching break cost, if you: 

• Switch to another loan, such as moving lender or product type, or
• Change interest rates, such as choosing another fixed rate or moving to a variable rate, or
• Modify your payment type, such as changing from principal and interest repayments to interest only repayments.

3. Defaulting break cost, if you:

• Default on your loan, meaning the total amount owing becomes due for repayment immediately, and the break is combined with a change in wholesale market interest rates during a fixed rate period.

What’s the prepayment threshold?

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

3. How are break costs calculated?

The break costs formula we use to provide break cost quotes is a complex one, which is why we don’t provide customers with a break cost calculator. A simplified description is that it relates to the difference in wholesale interest rates at the time of the change and the wholesale interest rate applicable when you began your fixed rate period. This is then applied to 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 at each remaining loan repayment date. 

What’s the ‘difference in wholesale interest rates’?

This 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?

How you are charged will depend on whether you’re paying out your loan in full before the end of the fixed rate period or making additional repayments above the threshold. Here's how it works at Westpac: 

Loan is paid out prematurely: Break cost will appear as a separate fee in the final payout figure.

Repayments exceeded threshold: Break fees will automatically be charged to the home loan account.

What if I don't think the fee is valid?

If you believe a lender incorrectly calculated a break fee, you can lodge a dispute with the Australian Financial Complaints Authority.

4. How do break cost calculators work?

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 complimentary break cost quotes prepared by our specialist home loan team and we do not charge for this service.

5. How can I get a break cost estimate?

You’ll need to contact your lender to get a break cost quote in today's dollars. They'll be able to confirm if break fees are applicable on your current fixed rate home loan.

If you're with Westpac, request a break cost quote by calling 132 558 8am-8pm (Sydney time), 7 days a week, or request a callback.

How long is a break cost quote valid for?

Break cost quotes are valid for 5 business days from the day the break fees are calculated. If you decide to proceed with breaking your fixed rate home loan, your request needs to be submitted within 5 business days of receiving the quote. For example, for a break cost calculated on Monday, the request must be lodged by close of business Friday of that same week.

6. How can I avoid break costs if I need to cut 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 them to see if they offer any loan features that may help you avoid paying fees.

What is portability?

Portability or 'substitution of security', is a home loan feature that lets you substitute the security you have on your home loan for another form. Security is generally a property, so when you port a loan, you are substituting the property securing the loan for a different one.
 

This is particularly handy when selling and buying at the same time, as it means you don’t need to close out or discharge your old 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 such as 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 typically faster than having to reapply, as you’ll save both on preparation time and the amount of paperwork.

How does portability work at Westpac?

There are two ways 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 be 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 ways you may be able to avoid break costs

Other options include:

Available cash above prepayment threshold

If you have extra funds you’d like to use to reduce your mortgage, you could consider putting the maximum you can up to your prepayment threshold into your home loan, then placing the rest into an interest-bearing account such as 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 anticipate having future cash sums that could exceed your prepayment threshold.

Significant change in family situation 

If a separation or divorce takes place, some lenders will allow the removal of the name of one of the borrowers 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, thus 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 should consider both sides of the coin. Compare all the features of your current loan and the new loan you are considering for refinancing, and factors such as:
 

Interest rate

• Is it variable or fixed?
• What’s the rate?
• If fixed, when does your current fixed term end and what will your break costs be?
• What fixed terms does your new loan offer? Westpac offers fixed terms from 1 up to 5 years.

Loan period

• How long have you taken the loan out for?
• When does your loan period end and what is the remaining term?
• Extending the remaining loan term may increase the total interest paid over the life of the loan

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?
• Does your new lender offer the same options?

Fees and charges

• What fees are being charged monthly?
• Do you have a home loan package and does your new lender offer the same?
• What fees could come into effect if you sell your home?

Features and extras

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

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

You never know when you might need to use a loan feature – and life can be unpredictable. Having the flexibility to call upon some loan features may become important in the future, so be sure you understand them before choosing a new lender.

Ask for a home loan health check

At Westpac, we’re here to help in any way we can. If your loan is not meeting your current needs, all it could take is just a 15-minute conversation to turn that around.

Simply give us a call 8am-8pm (Sydney time), 7 days a week on 132 558 or request a callback.

What does it cost to refinance your home loan?

When refinancing to another lender, it’s important 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 and reflect your financial situation.

You could be hit with:

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

You may also need to manage:

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

The real costs of refinancing explained