Understanding break fees starts with knowing the terminology. Here are the key terms every NZ homeowner should know.
A fee charged by banks when you repay or refinance a fixed-rate mortgage before the term ends. In New Zealand, break fees are calculated based on the difference between wholesale interest rates, not retail rates.
Example:
If you have 18 months left on a $500,000 fixed mortgage and rates have dropped 1%, your break fee might be approximately $7,500.
The official banking term for break fees in New Zealand. ERA compensates the bank for lost interest income when you break a fixed-rate loan early. It uses wholesale rates and present value calculations.
Formula:
ERA = Loan Balance × (Original Wholesale Rate - Current Wholesale Rate) × Remaining Term (years)The interest rate at which banks lend money to each other. Wholesale rates are typically 0.5% to 2% lower than retail mortgage rates. Break fees are calculated using wholesale rates, not the rate you pay.
Example:
If your retail mortgage rate is 6.5%, the corresponding wholesale rate might be around 5.0%.
The interest rate you actually pay on your mortgage. This is higher than the wholesale rate and includes the banks margin for profit and risk.
Example:
A typical NZ fixed mortgage rate might be 6.5% for a 1-year term.
A lump sum payment offered by banks to attract new mortgage customers. In NZ, cashback typically ranges from 0.7% to 1.0% of the loan amount. Cashback can offset break fees and legal costs when switching banks.
Example:
On a $500,000 mortgage, 0.8% cashback equals $4,000. This could cover legal fees ($1,000) and contribute to your break fee.
A mortgage where the interest rate is locked for a specific period (typically 6 months to 5 years in NZ). During this period, your repayments stay the same regardless of market rate changes. Breaking early incurs a break fee.
Example:
A 2-year fixed rate at 6.5% means you pay 6.5% for 24 months, even if market rates rise or fall.
A mortgage where the interest rate can change at any time based on market conditions. Floating rates are typically higher than fixed rates but offer flexibility - you can make extra repayments or refinance without break fees.
The process of locking in a new fixed rate when your current fixed term expires. Refixing with your current bank is free. Breaking early to refix at a lower rate may involve break fees.
Example:
When your 1-year fixed term ends, you can refix for another term at current rates without any fees.
The interest rate set by the Reserve Bank of New Zealand (RBNZ) that influences all other interest rates in the economy. When the OCR drops, mortgage rates typically follow. OCR announcements are made 7 times per year.
Example:
When RBNZ cuts the OCR from 5.5% to 5.25%, banks often reduce their fixed mortgage rates within days.
The percentage of your propertys value that you are borrowing. LVR = (Loan Amount / Property Value) × 100. In NZ, LVR affects the rates available to you and whether you need a low-deposit premium.
Example:
A $400,000 loan on a $500,000 property = 80% LVR. Below 80% LVR typically gets better rates.
The portion of your property that you own outright - the difference between your propertys value and what you owe. Equity = Property Value - Mortgage Balance. Higher equity means lower LVR and better borrowing options.
Example:
If your home is worth $800,000 and you owe $500,000, you have $300,000 in equity (37.5%).
Dividing your mortgage into multiple portions with different terms or rate types. For example, fixing part for 1 year and part for 2 years. Each portion has its own break fee if broken early.
Example:
A $600,000 mortgage split: $300,000 fixed 1-year at 6.5%, $300,000 fixed 2-year at 6.3%.
A professional who compares mortgage products from multiple lenders on your behalf. Brokers are typically free for borrowers (paid by banks) and can access exclusive rates. They handle paperwork and negotiate on your behalf.
A financial concept used in break fee calculations. It accounts for the time value of money - a dollar today is worth more than a dollar in the future. Banks use present value to calculate the exact break fee amount.
An administrative fee charged by your current bank when you pay off or transfer your mortgage. Typically $50-$150 in NZ. This is separate from the break fee.
Now that you understand the terms, calculate your actual break fee.
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