Should You Break Your Fixed Mortgage? Here's How to Calculate If It's Worth It

15 February 2025•5 min read•By Jarrod Kirkland

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Should You Break Your Fixed Mortgage? Here's How to Calculate If It's Worth It

Key Takeaways

1Banks cannot profit from break fees-they can only recover their actual losses.
2Always request break cost quotes from your bank before making a decision-they are provided free of charge.
3Compare total interest savings against break costs to determine if breaking makes financial sense.
4Break costs can be financed by topping up your mortgage if cash is unavailable.
5Break costs should be tested against the full refinance package, including cashback, legal costs, clawbacks, and structure.

Over the past 16 years, mortgage interest rates in New Zealand have had their fair share of ups and downs, creating situations where borrowers experience regret about their fixed rates.

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Over the past 16 years, mortgage interest rates in New Zealand have had their fair share of ups and downs, creating situations where borrowers experience regret about their fixed rates.

Break Costs Defined

When borrowers exit a fixed-rate contract early, banks charge break fees based on Wholesale Swap Rates. Importantly, the bank may charge you a break fee that covers their losses, though they cannot profit from the arrangement under New Zealand law.

Decision Framework

Answer three essential questions:

1Calculate interest savings between current and new rates

2Determine the break cost (available at no charge from banks)

3Assess affordability and repayment structure

Real Example

Jack and Jill, paying 7.5% averaged across accounts, faced an $11,923 break fee. However, they'd save $13,703 in twelve months, resulting in being $1,780 better off after fees-demonstrating the calculation approach.

Financing Break Costs

If cash isn't available, borrowers may top up their mortgage to cover break fees, ideally repaying the top-up within the new fixed term rather than spreading costs over decades.

Additional Considerations

Breaking mortgages typically requires no solicitor involvement, and borrowers can refix for different terms than their original agreements allowed.

How Break Costs Fit Into A Refinance Decision

A break cost does not automatically mean refinancing is a bad idea. It means the cost needs to be included in the net-benefit calculation. A refinance offer might include a lower rate, a cashback contribution, or a better loan structure, but those benefits should be compared against the break fee, legal costs, valuation costs, discharge fees, and any cashback clawback from your existing lender.

For example, if refinancing saves money over the next fixed term and includes cashback, that benefit may offset a modest break cost. If the break cost is large or the new structure is not meaningfully better, waiting until the fixed term expires may be smarter. Use this article alongside our refinance costs and cashback guide and main refinancing plan.

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Frequently Asked Questions

What are mortgage break costs?

Break costs are fees charged by banks when you exit a fixed-rate mortgage contract early. They are based on Wholesale Swap Rates and cover the bank losses, though banks cannot profit from break fees under NZ law.

How do I calculate if breaking my mortgage is worth it?

Calculate interest savings between current and new rates, get the break cost from your bank (free of charge), then compare. If savings exceed break costs, breaking may be worthwhile.

Can I add break costs to my mortgage?

Yes, if you do not have cash available, you can top up your mortgage to cover break fees. Ideally, repay this amount within the new fixed term rather than spreading costs over decades. Your mortgage adviser can help structure this appropriately.

How much are typical break fees in New Zealand?

Break fees vary significantly based on loan size, remaining fixed term, and rate movements. They can range from a few hundred dollars to tens of thousands. The only way to know your exact break cost is to request a quote from your bank, which they provide free of charge.

When might breaking my mortgage make sense?

Breaking makes sense when interest rate savings exceed the break cost. For example, if your break fee is $11,923 but you would save $13,703 in the next twelve months, you are $1,780 better off. Always run the specific numbers for your situation before deciding.

Do I need a solicitor to break my fixed mortgage?

No, breaking a fixed mortgage typically does not require solicitor involvement. You can arrange this directly with your bank. You can also refix for a different term than your original agreement allowed, giving you flexibility in your new structure.

Should I break to refinance to another bank?

Consider break costs alongside any [refinancing](/blog/when-is-the-right-time-to-refinance-your-mortgage) benefits. If you are breaking to move banks, factor in the new banks cash contribution, potential rate savings, and total switching costs. Sometimes waiting until your fixed term ends avoids break fees entirely.

How are break costs calculated by banks?

Banks calculate break costs based on Wholesale Swap Rates-essentially what it costs them to provide fixed-rate funding. If rates have dropped since you fixed, the bank faces a loss which becomes your break fee. If rates have risen, break costs may be minimal or zero.

Can cashback offset my mortgage break fee?

Yes, cashback can offset a break fee, but only after legal costs, valuation costs, discharge fees, and any cashback clawback are included. The best test is the net benefit after every cost and condition.

Disclaimer

The information on this website is for general guidance only and does not constitute financial or investment advice. Always do your own research and seek personalised advice from a qualified financial adviser or mortgage adviser before making financial decisions. All investments carry risk and past performance is not indicative of future results.

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