15 May 2021

Fixed Rate Break Costs: 3 Things an Applicant Should Know Before Signing

If you plan to pay off your mortgage before the maturity date, it’s important to find out the penalties that will be incurred. There are fixed rate break costs for this home loan, for example. 

Here we go over the details of the break costs to deliver some clarity.

What is a Break Cost?

The fixed-rate mortgage offers several benefits such as an interest rate that doesn’t fluctuate. For that stability, you agree to make monthly repayments for the following 30 years. The lender counts on that stability, too. A deviation from the contract causes the lender to incur a loss.

A break cost covers the lender’s loss when a client switches their home loan product, rate, or payment type when the rate is fixed.

Why are Break Costs Charged?

Lenders borrow money at certain rates inclusive of insurance for interest rates known as “hedging” because the applicant agrees to the proposed loan terms. In the fixed-rate case, lenders borrow the funds at wholesale interest rates. The lender depends on the applicant to follow through with the contract because they received a discount. A break from the contract delivers a change in the interest rate and leads to a loss.

Where Does the Break Cost Go?

The break cost goes to the lender. In turn, the lender covers their loss. A formula calculates the loss, which is passed onto the client. To avoid this fee, it’s important to consider all options and possibilities before agreeing to any loan terms.

Fixed Rate Break Costs Conclusion

Individuals who come into a windfall of money can pay off their mortgage early even though they’ll incur fixed rate break costs. Sometimes it makes fiscal sense to take care of the debt as soon as possible. For more information, contact our Mortgage House lending team. Our mortgage calculator is also at your disposal.

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