If you repay all or part (more than 5% p.a.) of your loan balance before the end of your fixed interest rate period, an administration fee of $250 applies. In addition, you may also need to pay an Early Repayment Recovery charge.
What is Early Repayment Recovery and why is it charged?
A Fixed Interest Rate Loan is a contract between you and the Bank to borrow a certain amount of money, at an agreed interest rate, for an agreed period of time. In order to lend you the money, the Bank may borrow the money in the money market. This means the Bank enters a similar contract with another lender to borrow the money at a fixed interest rate for an agreed period of time. If you repay your loan early, the Bank still has to honour that contract with another lender and pay the fixed interest rate on the money it has borrowed.
Whether you will have to pay an Early Repayment Recovery charge depends on a number of factors, but in general:
- If interest rates have fallen since you took out your loan, an Early Repayment Recovery charge will generally apply. This is because the Bank has to pay more interest on the money it’s borrowed than it can earn on the money you’ve paid back, so the Bank incurs a loss. The Early Repayment Recovery charge is to cover that cost to the Bank as a result of you ‘breaking’ your Fixed Interest Rate contract with it.
- If interest rates have risen since you took out your loan, an Early Repayment Recovery charge generally won’t apply. That’s because the Bank has not incurred additional costs as a result of you repaying all or some of your loan before the end of the fixed interest rate term.
- In both cases, if you received a discount on the fixed interest rate when you took out your loan, Early Repayment Recovery may still apply. This is because the Bank may still incur a loss as a result of providing you with a discounted interest rate.
The administration fee of $250 applies regardless of whether the Early Repayment Recovery charge applies.
How much is the Early Repayment Recovery charge likely to be?
It’s different for each situation. The Early Repayment Recovery charge is worked out using quite a complex formula and depends on:
- How much you are repaying
- How long before your fixed interest rate period expires
- The difference between current interest rates and your fixed rate.
Here's some more information that may be useful:
- An example (PDF) to give you an indication of Early Repayment Recovery charges.
- How can you avoid paying an Early Repayment Recovery charge?
A detailed view of the Early Repayment Recovery formula is set out in your home loan documentation.
If you’re thinking about repaying all or part of your Fixed Interest Rate home loan early, we can give you an indication of what the Early Repayment Recovery charge may be to help you decide whether you want to proceed. Just call us on 0800 185 185.
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