Break cost

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A break cost is the cost of breaking a contract and is normally associated with repaying a fixed interest rate loan before its term. Break cost is sometimes called a break fee or an early repayment fee. It is best explained as a lenders economic cost recovery.

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Economic cost recovery

If a lender agrees to change the terms of a contract and the changes result in an 'economic cost' to the lender (which may be a loss of profit) then the lender may recover its 'economic cost' from the other party to the contract - the borrower. The lender's 'economic cost' is a function of the loan amount, the unexpired term of the contact and the differential in the underlying cost of funding the loan. The calculation is complex and lenders use differing calculations. However in general and in relation to the early repayment of a fixed interest rate loan, if comparable interest rates have risen then the lender's economic cost may be zero but, if comparable interest rates have fallen then the lender may incur 'economic costs' relating to the early repayment of its loan. These 'economic costs' which may include the lender's profit may be recovered from the borrower.