Glossary
Break costs
Also called: break fee, economic cost
Break costs are charges a lender may impose when a fixed-rate loan is repaid or changed before the fixed period ends. They are intended to compensate the lender for losses from the early repayment and depend on rates at the time.
An example
A business owner sells a property while its loan is on a fixed rate. The lender calculates a break cost based on the difference between the fixed rate and current wholesale rates for the remaining period.
Why it matters
Break costs can be large and hard to predict. If there is any chance a loan will be repaid early, ask how break costs are calculated and consider whether a variable rate gives more flexibility.
Points to check
Ask the lender how break costs are calculated, whether there is a cap and whether you can get an estimate before deciding to repay or refinance. Break costs usually arise when market rates have fallen since you fixed, so the amount can change from day to day. For regulated loans, lenders must give certain information about break costs. Check whether partial repayments during the fixed period are allowed without triggering a charge, and whether any fee applies on top of the economic cost.