Beginner's Guide to Rate Lock-ins and Break Costs

Fixed Rate Lock-ins: What You're Actually Signing Up For

A fixed interest rate locks your repayments at a set figure for an agreed period, typically one to five years. You pay the same amount regardless of what happens to variable rates during that time. Lenders price fixed rates based on what they expect wholesale funding costs to be across that period, which is why fixed rates can sit higher or lower than variable rates at any given moment.

Locking in a rate gives you certainty over what leaves your account each month. If you're an electrician with contract income that fluctuates between projects, that predictability can make budgeting more straightforward. You know your repayment amount on the first of the month and the first of the year.

The trade-off is inflexibility. Most fixed rate products restrict additional repayments to a cap of around $10,000 to $30,000 per year. Some lenders allow none at all. If you land a lucrative commercial job and want to throw $40,000 at your loan, you'll either hit that cap or trigger a break cost.

What Are Break Costs and When Do They Apply?

A break cost is the fee a lender charges when you exit, refinance, or substantially vary a fixed rate loan before the end of the agreed term. It compensates the lender for the difference between the rate they locked in with you and the rate they can now achieve when they re-lend that money in the current market.

Break costs apply when you sell the property, refinance to another lender, switch from fixed to variable with the same lender, or make additional repayments above your product's annual cap. The calculation compares the interest rate on your fixed loan to the current wholesale rate your lender uses for the remaining lock-in period. If rates have dropped since you fixed, the lender loses income when you leave, and you pay the difference. If rates have risen, the break cost is often nil because the lender can re-lend at a higher margin.

Consider a scenario where you fixed at 5.8% for three years and decide to sell after 18 months. If the lender's current wholesale rate for an 18-month term is now 4.2%, they're losing 1.6% per year on the remaining term. That gap, multiplied by your outstanding loan balance and the time left, becomes your break cost. On a loan balance of $500,000 with 18 months remaining, that difference could amount to several thousand dollars.

How Lenders Calculate the Break Cost Figure

Lenders use a formula that takes your current loan balance, the interest rate differential, and the remaining fixed term. The exact method varies between lenders, but the core components are consistent. Some lenders apply an administrative fee on top of the calculated figure, others include it within the formula.

The rate differential is the gap between your locked rate and the lender's current cost of funds for the same remaining period. That cost of funds is not the advertised variable rate or the current fixed rate being offered to new customers. It's based on the wholesale swap rate, which reflects what the lender pays in the funding market right now.

You won't know the exact break cost until you request a payout figure from your lender. The calculation is dynamic and changes daily as wholesale rates move. A break cost estimate provided today might be different in two weeks. If you're considering selling or refinancing while still inside a fixed term, request a formal discharge or payout statement before making any commitments.

Should You Split Between Fixed and Variable?

Splitting your loan between fixed and variable portions gives you partial certainty and partial flexibility. You might fix 60% of your loan and leave 40% variable, or split it evenly. The variable portion lets you make unlimited additional repayments and typically comes with an offset account, which reduces the interest you pay without locking funds inside the loan.

If you're working as a self-employed sparky and your income spikes when you pick up a commercial fit-out or solar installation run, the variable split gives you somewhere to park that excess cash and reduce interest immediately. The fixed portion keeps your minimum repayment stable, which helps when work slows between projects.

Splitting does mean you're managing two loan accounts under the one facility. Some lenders charge separate annual fees for each split. Others apply one package fee across the whole loan. When you're comparing split structures, check what the total fee position looks like, not just the interest rate on each portion.

Refinancing Before Your Fixed Term Ends

Refinancing while you're still locked into a fixed rate will trigger a break cost unless rates have moved in your favour. If you're refinancing to access equity for a renovation or to buy an investment property, you need to weigh the break cost against the benefit of the new loan structure.

In some cases, the rate saving or feature improvement on the new loan offsets the break cost within 12 to 18 months. In others, it doesn't. Running the numbers before you lodge an application is non-negotiable. Some lenders will capitalise the break cost into your new loan balance, which means you don't pay it upfront but you do pay interest on it for the life of the loan.

If your fixed rate is due to expire within six months, most lenders will let you apply for a refinance and time settlement to occur just after the fixed term ends, avoiding the break cost altogether. That requires coordination with your broker and your settlement agent, but it's a common approach when the calendar is on your side.

Selling the Property While Fixed

When you sell a property that still has a fixed rate loan attached, the break cost is deducted from your sale proceeds at settlement. Your lender provides a payout figure to your conveyancer, which includes the outstanding loan balance, accrued interest, discharge fees, and any applicable break cost.

If you've found another property and you're buying and selling at the same time, some lenders allow you to port the existing fixed rate loan to the new property. Porting avoids the break cost, but it's not universally available and the new property must meet the lender's security criteria. If you're upsizing and need to borrow more, the additional funds will usually be priced at the current fixed or variable rate, not the rate you're porting across.

Porting works when your settlement dates align and the loan amount you're moving across matches or is close to your current balance. If the timing doesn't line up or you're changing loan structures, you'll likely break the fixed term and wear the cost.

Offset Accounts and Fixed Rates Don't Mix

Most fixed rate products do not offer an offset account. Offset accounts reduce the interest you're charged by offsetting your savings balance against your loan balance, but they only work with variable rate loans or the variable portion of a split loan.

If you fix your entire loan and you've been relying on an offset to manage interest, that benefit disappears for the duration of the fixed term. Your savings sit in a separate account earning minimal interest while your loan balance is charged the full fixed rate. For electricians who accumulate cash between jobs, losing offset functionality can mean paying more interest overall, even if the fixed rate itself is lower than the variable rate at the time.

If offset access matters to your cash flow, a split loan structure keeps that option open on the variable portion. You can still lock in part of your loan for certainty while maintaining offset benefits on the rest.

What Happens When Your Fixed Term Ends?

When your fixed term expires, your loan automatically reverts to your lender's standard variable rate unless you proactively choose a new rate option. The standard variable rate is almost always higher than the discounted variable rates offered to new customers or existing customers who negotiate.

Your lender will send you a letter 30 to 60 days before your fixed term ends, outlining your options. You can refix at a new rate for another term, switch to a variable rate, or split between both. You can also refinance to another lender without triggering a break cost once the fixed term has expired.

This is the moment to review your loan structure. If your circumstances have changed since you first locked in the rate, the product that made sense three years ago might not suit where you are now. Some lenders offer loyalty discounts or retention rates if you contact them before the fixed term ends. Others don't, and you'll need to either negotiate or move.

Call one of our team or book an appointment at a time that works for you. We'll review your current loan structure, calculate any break costs if you're still inside a fixed term, and show you what your options look like based on where rates sit now and where your business and income are heading.

Frequently Asked Questions