When to Lock In & When to Pay Break Costs

What a Rate Lock Actually Does

A rate lock fixes your interest rate for a set period, typically one to five years. Once locked, your repayments stay the same regardless of what the Reserve Bank does with the cash rate.

Consider a sparky who locked in at 2.4% when rates were at record lows. When variable rates climbed to 6%, that decision saved hundreds per month in repayments. The flip side is what happens when you need out early.

How Break Costs Are Calculated

Break costs exist because your lender loses money when you exit a fixed rate early. They've locked in funding at a certain rate based on your loan, and breaking that contract means they need to recoup the difference between what they expected to earn and what they can earn now.

The calculation compares your fixed rate to the current wholesale rate for the remaining lock period. If rates have dropped since you locked in, you'll wear a break cost. If rates have risen, there's usually no cost or you might get a small rebate.

In our experience, tradies get caught when they need to sell or refinance during a fixed period without checking the numbers first. A chippy we worked with recently wanted to refinance to access equity for a work ute. His break cost came in at $8,400 on a $520,000 loan with 18 months left on his fixed term. Rates had dropped 0.8% since he locked in, and that gap applied to the remaining fixed period created the fee. He ended up waiting six months, then refinanced when the cost dropped to $2,100 as the fixed period wound down.

When Break Costs Hit Hardest

The bigger the rate gap and the longer left on your fixed term, the higher the cost. A 1% rate difference with three years remaining will hurt more than a 0.3% difference with six months to go.

You'll also cop a break cost if you:

• Sell the property and the loan isn't portable
• Refinance to another lender or switch loan products
• Make extra repayments beyond your allowed limit, usually $10,000 to $30,000 per year depending on the lender
• Switch from interest-only to principal and interest before the fixed term ends

Some lenders let you port the loan to a new property without a break cost, but you'll need to settle the new purchase before or at the same time as selling the old one. That timing doesn't work for everyone.

Split Loans as a Middle Option

A split loan divides your borrowing between fixed and variable portions. You might fix 50% or 60% and leave the rest variable.

This setup lets you lock in some certainty while keeping flexibility on the variable portion. You can make extra repayments into the variable side without penalty, and if you need to refinance or sell, the break cost only applies to the fixed portion. The variable portion moves with rate changes, so if rates drop you'll benefit on that chunk straight away.

A plumber we know split his $680,000 loan as 60% fixed at 5.8% and 40% variable at 6.1%. When he landed a commercial contract and wanted to pay down $50,000 in one hit, he dumped it all into the variable portion. No break cost, no penalty, and he kept the locked rate on the majority of the loan.

Reading the Break Cost Estimate

Your lender is legally required to give you a break cost estimate before you commit to exiting a fixed rate. This isn't a guess. It's a calculation based on current wholesale rates and your remaining fixed term.

The estimate will show:

• Your current fixed rate
• The comparison rate used by the lender
• The remaining term on your fixed period
• The total break cost in dollars

If the number looks wrong, ask for the calculation breakdown. Some lenders use different comparison rates depending on how they've funded your loan, and that can shift the final cost by thousands.

When Paying the Break Cost Makes Sense

Sometimes copping the fee is the right move. If you're refinancing to a much lower rate and the interest savings outweigh the break cost within 12 to 18 months, the numbers can stack up.

Run the calculation like this: take the break cost, divide it by your monthly saving on the new loan, and you'll see how many months it takes to recover the fee. If that's under two years and you're planning to keep the loan longer, it's worth considering. If it's three or four years, you're likely better off waiting until the fixed term expires unless there's another reason like accessing equity or consolidating debt that tips the balance.

Variable Rates and Flexibility

A variable rate gives you full flexibility to make extra repayments, access redraw or an offset account, and refinance without penalty. The trade-off is your repayments move with rate changes.

For tradies with variable income, being able to dump cash into the loan during high-earning months and redraw if work slows down can matter more than locking in a rate. If you're planning to sell or refinance within two years, or if you want to pay the loan down aggressively, variable makes more sense than fixed.

Variable rates also tend to drop faster than fixed rates when the Reserve Bank cuts the cash rate, though they rise just as quick when rates go up.

What Happens at Fixed Rate Expiry

When your fixed term ends, your loan automatically reverts to the lender's standard variable rate unless you take action. That revert rate is usually higher than the discounted variable rate offered to new customers, sometimes by 0.5% to 1%.

This is when you should either refinance or negotiate a new rate with your current lender. Don't let it roll over without checking what you're moving onto. A loan health check a few months before your fixed term expires will show whether you're still on a solid deal or whether another lender or product makes more sense.

Call one of our team or book an appointment at a time that works for you. We'll run the numbers on your current loan, show you what a break cost would look like if you're locked in, and work out whether refinancing, splitting, or sitting tight makes the most sense for your situation.

Frequently Asked Questions