Economic costs on a fixed rate loan

What is economic cost?

Economic cost (or break cost) is a fee that a lender may charge you if you pay off your fixed rate mortgage before the end of the agreed fixed term. Fixed rate home loans are appealing to a home buyer because they give you the peace of mind of a locked-in interest rate for a certain amount of time (like one to five years). This means you repayments won’t change even if the market rates go up or down. However, this lock-in works in both ways. 

When NAB lends you money for a fixed period of time, we borrow it from the financial markets. This consists of funds from other banks, customer deposits, blue chip investors, among others.

The interest rate on the money we borrow is known as the 'cost of funds'. If you make additional repayments, refinance or pay out your fixed rate loan early, the original loan term remains the same. Accordingly, an economic cost is charged to us and this is why we pass this cost on to you. In short, an economic cost is a kind of penalty for changing a fixed rate loan early, and it’s designed to protect the lender from losses.

When could I be charged economic costs?

You may be charged economic costs during a fixed rate period when you:

• make extra repayments more than $20,000
• pay out your fixed rate loan early
• switch to a different interest rate
• switch from a fixed rate loan to a variable rate loan.

Can I make extra repayments?

Some loans allow you to make extra repayments without being charged economic costs. Our NAB fixed rate home loans, for instance, allow you to make up to $20,000 in extra repayments during a fixed rate period without incurring economic costs.

How is economic cost calculated?

We’ll consider factors like:

• the change in the cost of funds since you took out your fixed rate loan
• the term remaining in the fixed rate period
• the amount you’re repaying.

If the cost of funds drops and you pay off more than the scheduled repayments, you could be charged a break fee.

Here’s an example of how this fee may be calculated.

How much are economic costs?

The cost of funds changes each day—which obviously affects the calculation of economic costs. You'll need to talk to your home loan expert or banker to get a quote. Talk to them before you pay it out or change your loan.

Avoiding economic cost

Economic costs can be considerable so think hard about the pros and cons of a fixed rate loan before you decide to fix it. If you’re hoping to pay your loan off early, then a fixed rate loan may not be suitable for you.

If you already have a fixed rate loan and you’re thinking about making extra repayments, talk to a home loan expert first.