When does it make sense to pay a break fee?
It’s easy to assume that breaking your mortgage is never worth it. But that’s not always true.
Sometimes, paying the break fee can actually save you money (or make your life a bit easier).
Here are a few common scenarios:
#1 – If you’re selling or refinancing your home
If you’re selling your home or investment property, you may have no other choice but to break your fixed interest rate.
You can sometimes “move” your mortgage to your new home (called porting), but the timing has to be perfect.
#2 – You want to pay off your mortgage
Sometimes you come into some cash, and you’re in a position to pay off a large chunk of your mortgage years.
Maybe you’ve received an inheritance, sold a business, or offloaded that classic car.
If you want to pay off part of your mortgage, you may be charged a break fee (because you’re still breaking the fixed interest rate contract).
But paying down your mortgage early could save you a lot in interest.
In this case, paying the break fee might be worth it because you’ll save much more in the long run.
#3 – You’re struggling with repayments
When rates were over 7%, a 6% interest rate looked fine. But now with interest rates below 5%, you could be paying hundreds of dollars more each month compared to what other people are today.
Breaking and refixing lower might cut your payments enough to give you some financial relief. Some borrowers even add the break fee to their loan, spreading the cost instead of paying upfront.
#4 – You’re chasing a lower rate (and the numbers stack up)
Let’s say you’re fixed at a high 6%, but the new 1-year rate is 4.5%.
Even if you pay a 1% break fee, that lower rate could save you more over the next year … especially if your loan is large.
But you won’t know for sure until you run the numbers. That’s where it’s worth working with a mortgage adviser. They’ll run these nerdy-numbers for you, so you know for sure.
