Will I pay a break fee to repay my loan early?

Floating interest rate loans

In general, you should not pay a penalty if your loan is on a variable or a capped interest rate.  However, you may face penalties if your loan included promotional discounts or offers with certain conditions regarding any early repayment of the loan. 

Fixed interest rate loans

If some or all of your loan is on a fixed interest rate then you may pay a fee to break your contract. The total fee could comprise the lenders' economic cost recovery plus administration fees.

Lenders often use different formula to calculate their break fees and the calculations are complex.  Some of the factors that influence the calculation are quite visible but the key variable influencing the calculation which is not visible is the underlying cost of funding the loan. 

• the loan size,
  
• the fixed interest rate,
  
• the unexpired term of the contact, and
  
• the underlying cost of funding the loan.
  

The rule of thumb

• If prevailing interest rates have fallen below your fixed interest rate then you will probably pay a break fee. You may also be charged an administration fee. 
  
• If prevailing interest rates have risen above your fixed interest rate then you may only be charged an administration fee.