Mortgage Break Fees - The Definitive New Zealand Guide

A mortgage break fee is a penalty your lender may charge if you pay off the loan balance too early - our guide explains how this works, what it can cost, alternatives to breaking fees and frequently asked questions.

Updated 4 February 2023

Summary:

With the rise in the Official Cash Rate (OCR) pushing mortgage interest rates to recent highs, many New Zealanders are worrying about their upcoming mortgage repayments. The higher the OCR, the more uncertain many New Zealanders' financial situations will become.
As a result, New Zealand homeowners may seriously be considering selling their property to get rid of the mortgage or accelerate the rate at which they pay down their mortgage to reduce total mortgage interest costs.
However, New Zealanders may also be worried about potential break fees associated with paying off their mortgage early.
Mortgage break fees can be a high cost for homeowners looking to switch lenders or pay off their mortgage early and may not always be the most financially viable option. Therefore, it's a good idea to consider the long-term financial implications of breaking your mortgage and weigh the costs against the potential benefits. You may also want to speak with a mortgage broker to help you determine the best course of action.
Important - it is impossible to know the cost of breaking a mortgage without talking to the lender given the formulas and calculations used.

To help you understand your options and the costs involved, our guide covers:

What are Mortgage Break Fees?

Mortgage break fees are charged by mortgage lenders when a borrower pays off their mortgage early or switches to a new lender before the end of their mortgage term. These fees are intended to compensate the lender for the loss of future interest payments that would have been earned had the borrower continued with their current mortgage until the end of the term.

Mortgage break fees are typically a percentage of the remaining mortgage balance. However, they can vary widely depending on the lender, the mortgage product, and the time remaining on the mortgage term. Generally, the longer the remaining mortgage term, the higher the break fee will be.

Know This: You'll need to talk to your lender to get the exact number

Kiwibank, for example, explains break fees in its 30+ page mortgage terms and conditions PDF, although the exact cost isn't clear on first inspection;. we argue this is an issue among all lenders.
For example, Kiwibank states "We apply our own mathematical formula to calculate your fixed rate break cost, which we consider reflects a reasonable estimate of our loss in these circumstances" and then proceeds to outline the costs with a four-step formula that doesn't include the values used.
This makes it impossible to know the cost of breaking a mortgage without talking to the lender.

When do mortgage break fees apply?

Mortgage break fees apply in specific situations set out in the mortgage agreement. Generally, mortgage break fees apply when borrowers pay off their mortgage early, either in full or through a partial payment, or when they switch to a new lender before the end of their mortgage term. This scenario can also include situations where a borrower refinances their mortgage with a new lender or sells their home and pays off the mortgage with the proceeds.

Know This: Mortgage break fees may also apply if a borrower misses a mortgage payment or if they default on their mortgage. In these cases, the lender may charge a break fee in addition to any late fees or penalties that may be owed.

Not all mortgages have break fees: Some mortgage products may not have break fees. Variable and floating rate mortgages don't have break fees. It's a good idea to carefully review the terms and conditions of your current mortgage before deciding to pay it off early or switch lenders to ensure that you understand any potential break fees that may apply.

How Can I Calculate a Mortgage Break Fee?

Mortgage break fees are typically calculated as a percentage of the remaining mortgage balance. The exact percentage will depend on the lender, the mortgage product, and the time remaining on the mortgage term. Generally, the longer the remaining mortgage term, the higher the break fee will be. Mortgage break fees can range from a few percent to more than 10%.

To calculate your mortgage break fee, you will need to know the following:

The outstanding balance of your mortgage: This is the amount you owe on your mortgage, including any unpaid interest.
The mortgage break fee percentage: This is the percentage of the remaining mortgage balance you will be required to pay as a break fee. You can find this information by looking at your mortgage documents or by contacting your lender.

What’s an example of a mortgage break fee calculation?

To calculate your mortgage break fee, you can use the following formula:

Mortgage break fee = Remaining mortgage balance x Mortgage break fee percentage
As a practical example, if you have a remaining mortgage balance of $200,000 and a mortgage break fee percentage of 5% as listed in your mortgage contract, your mortgage break fee would be $10,000 ($200,000 x 5%).

Generally, the higher the outstanding mortgage balance, the less reluctant New Zealanders will be to break their mortgage early. However, the potential benefits to breaking a mortgage (either by paying off the balance in full or switching lenders) can outweigh the mortgage break fee if the benefit gained (through interest savings or lower interest rate) is more significant than the break fee.

How can I find out what the total cost will be to break a mortgage? You'll need to speak to your lender who will calculate the cost based on their formula and inputs.

Ways to Minimise or Avoid Mortgage Break Fees

What Are Ways I Can Minimise or Avoid Mortgage Break Fees?

There are a few ways that you can minimise or avoid mortgage break fees altogether:

1. Consider switching to a mortgage product with no break fees.

Some mortgage products, such as variable and floating rate mortgages, won't have break fees. Therefore, if you’re considering switching lenders or paying off your mortgage early, you may consider switching to one of these mortgages to minimise or avoid break fees. However, if your current mortgage already has a break fee provision, it’s unlikely you’ll be able to break your existing mortgage without paying the break fee. However, we suggest talking to your existing lender about your plans to switch from a fixed to a floating deal - in some circumstances, lenders can be flexible with break fee provisions.

2. Negotiate with your lender.

If you're considering paying down your mortgage early or switching to a new lender, you may be able to negotiate with your current lender to reduce or waive the break fee. This negotiation may be more successful if you've been a good customer and made all your mortgage payments on time. Additionally, if you’re able to articulate good reasons why you need to break your mortgage early (whether due to financial hardship, moving overseas or for personal reasons), a bank may be more likely to waive the break fee.

3. Pay off your mortgage gradually, rather than all at once.

Instead of paying off your mortgage in full or making a large partial payment, you may be able to avoid or minimise break fees by making smaller extra payments to your mortgage each month within an allocated allowance of over-payments. Making smaller extra payments can help you pay your mortgage faster through reduced interest expense without triggering the mortgage break fee provision (incurring significant break fees).

4. Wait until the end of your mortgage term.

If you can afford to do so, you may be able to avoid mortgage break fees altogether by waiting until the end of your mortgage term to switch lenders or pay off your mortgage. However, this may not be an option for everyone, as you may need to switch lenders or pay off your mortgage early for financial or personal reasons. Additionally, you’ll still pay the full amount of interest expense if you wait until the end of your mortgage term.

Top Tips for Homeowners Considering Breaking their Mortgage

1. Make sure you fully understand the terms and conditions of your mortgage.

This includes any potential break fees, before deciding to pay it off early or switch lenders. Often, homeowners will be focused on other key areas of the mortgage agreement, like the interest rate or loan period, rather than provisions like the mortgage break fee section. However, all provisions of the mortgage agreement will be relevant and applicable, so it’s important you fully understand all aspects of your mortgage agreement.

2. Shop around for the best offer from competing banks.

If you’re considering switching mortgage lenders or paying off your mortgage early, it's a good idea to compare mortgage rates and fees to find the best deal. Remember that the lowest mortgage rate may not always be the best option if it comes with high break fees or hidden costs. Therefore, it's important to consider the overall cost of the mortgage, including any break fees, when making your decision - a mortgage broker knows this market and can assist.

3. Consider the long-term costs of breaking your mortgage above and beyond the break fee.

While breaking your mortgage may save you money in the short term, it may also cost you more in the long term. For example, if you switch to a mortgage with a lower interest rate, you may save money on your monthly mortgage payments but also pay more in break fees. Therefore, it's important to consider, calculate and compare the long-term costs and benefits of breaking your mortgage before deciding.

4. Before breaking your mortgage, seek financial advice from a registered financial advisor.

Homeowners need to understand the terms and conditions of their mortgage, including any potential break fees, before deciding to pay it off early or switch lenders. They should also consider the long-term costs and benefits of breaking their mortgage and seek financial advice if they are unsure about their options.

Suppose you are unsure whether to break your mortgage or have questions about the potential costs and benefits. In that case, it's a good idea to seek financial advice from a qualified professional. A mortgage broker can help you understand your options and make an informed decision; our guide has more information about the services offered by mortgage brokers.

5. You can break your mortgage without incurring any fees (subject to the mortgage agreement).

It is possible to make extra payments (known as overpayments) on your mortgage without incurring a fee as long as you do not pay off the entire balance before the agreed-upon term. However, it is important to check the terms of your mortgage and speak with your lender before making any decisions about early repayment. Below are a few ways to break your mortgage without incurring fees.

For example, the ANZ allows you to make extra repayments without being charged an Early Repayment Recovery, including increasing regular repayments by up to $250 a week and making an extra lump sum repayment that's no more than 5% of your current loan amount. Bank guidance includes:

Mortgage Break Fee Must-Know Facts

1. Before signing up for a mortgage or switching mortgages, fully read the contract's provisions (especially regarding break fees).

It's important to carefully review the terms and conditions of your mortgage and seek financial advice before deciding to pay off your mortgage early or switch lenders to ensure that you understand any potential break fees that may apply. Unfortunately, many banks will not disclose these conditions and assume you've read all the conditions when you sign the mortgage agreement. Therefore, it's important to either read it thoroughly or get a lawyer to review the agreement beforehand to ensure you're fully aware of what you might be liable for.

2. Watch out for additional fees above and beyond the mortgage break fee.

Mortgage break fees may include other fees and charges, such as legal, valuation, and processing fees. These additional fees may vary depending on the lender and the circumstances of your mortgage break. What you may estimate to be only a small fee to break your mortgage may become significantly more costly when you add in all the other fees associated with breaking your mortgage. Therefore, you must understand all the costs you'll likely incur if you break your mortgage.

3. Break fees may be more expensive for fixed-rate mortgages.

Not all mortgage products have break fees associated with them. Mortgage break fees are typically higher for fixed-rate mortgages than for variable or floating-rate mortgages. This rate differential exists because fixed-rate mortgages offer a fixed interest rate for a set period. The lender is counting on receiving a certain interest over the term. If the borrower pays off the mortgage early or switches to a new lender, the lender will lose out on the expected interest payments, and the break fee is intended to compensate for this loss.

4. Break fees may be waived in some circumstances.

In some cases, mortgage lenders may waive the break fee if the borrower can demonstrate that they have extenuating circumstances, such as a significant change in their financial situation or a medical emergency. It's a good idea to speak with your lender if you believe you have grounds for waiving the break fee.

5. Break fees may be tax-deductible.

In some cases, mortgage break fees may be tax-deductible in New Zealand. According to the Inland Revenue Department (IRD), break fees may be tax-deductible if they are incurred due to a borrower's business or investment activities. While this won't cover home loans, if your mortgage break fee is related to business, it's a good idea to speak with a tax professional to determine whether your mortgage break fees are tax-deductible.

Frequently Asked Questions

How do I know if I’ll have to pay a mortgage break fee on my current mortgage?

The first place to look if you’re concerned about mortgage break fees is your mortgage agreement. Your mortgage agreement will detail whether you need to pay a break fee if you break your mortgage early. Alternatively, your bank or lender will understand the conditions of your mortgage and can guide you through this process. Get in touch with your bank or lender and ask whether you’ll need to pay a break fee if you follow through on your decision to either switch lenders or pay off the mortgage early.

Why would I want to break my mortgage?

There are a few reasons why someone might want to break their mortgage:

Interest rate changes: Interest rates may have dropped significantly since they took out their mortgage. In this case, breaking the mortgage and taking out a new one at a lower interest rate could save the borrower a significant amount of money in the long run. While lower interest rates are unlikely in New Zealand in the coming years, the reason remains valid.
Change in financial situation: The borrower's financial situation has changed significantly, making it difficult to afford the monthly mortgage payments. Breaking the mortgage and finding a more affordable option could help the borrower avoid defaulting and losing their home.
Desire to sell their home: The borrower wants to sell their home and needs to pay off the mortgage to do so. Breaking the mortgage would allow the borrower to pay off the outstanding balance and be free to sell the home without the burden of a mortgage.

It's important to note that breaking a mortgage can be expensive, as it usually involves paying the penalty to the lender. It's also worth considering the long-term financial implications of breaking a mortgage and taking out a new one. It may be more cost-effective to refinance the existing mortgage instead of breaking it.

I want to break my mortgage early. How can I do this?

You'll need to pay off the remaining balance on your mortgage in full to break your mortgage early. Breaking your mortgage early usually involves paying the penalty to the lender, known as a mortgage breakage fee or prepayment charge. The amount of the fee will depend on the terms of your mortgage and the current interest rates.

There are a few ways to pay off the remaining balance on your mortgage:

First, sell your home: If you sell your home, you can use the proceeds from the sale to pay off the remaining balance on your mortgage.
Refinance your mortgage: If you have equity in your home and can qualify for a new mortgage at a lower interest rate, you may be able to refinance your existing mortgage and use the funds from the new mortgage to pay off the old one.
Use your savings: If you've come into some money recently or have enough savings to pay off the remaining balance on your mortgage, you can use those funds.

It's important to note that breaking a mortgage can be expensive and may not always be the most financially viable option. Therefore, it's a good idea to consider the long-term financial implications of breaking your mortgage and weigh the costs against the potential benefits. You may also want to speak with a mortgage broker to help you determine the best course of action.

When do mortgage break fees apply?

Mortgage break fees typically apply when borrowers pay off their mortgage early, either in full or through a partial payment, or when they switch to a new lender before the end of their mortgage term. In addition, mortgage break fees can apply when a borrower refinances their mortgage with a new lender or when they sell their home and pay off the mortgage with the proceeds. Mortgage break fees may also apply if a borrower misses a mortgage payment or if they default on their mortgage.

How are mortgage break fees calculated?

Mortgage break fees are typically calculated as a percentage of the remaining mortgage balance. The exact percentage will depend on the lender and the mortgage product, ranging from a few percent to more than 10%.

To calculate your mortgage break fee, you can use the formula: Mortgage break fee = Remaining mortgage balance x Mortgage break fee percentage.

How do I know if I’ll have to pay a mortgage break fee?

The best way to know if you’ll have to pay a mortgage break fee is to carefully review your mortgage's terms and conditions. This information should be provided in your mortgage documents, or you can contact your lender to inquire about any potential break fees that may apply.

Is it always a good idea to break my mortgage?

Whether or not it's a good idea to break your mortgage will depend on your circumstances and financial goals. It's important to carefully consider the long-term costs and benefits of breaking your mortgage and any potential break fees before making a decision. You may also want to seek financial advice from a qualified professional to help you understand your options.

Why do mortgage break fees exist? First, they seem unfair to homeowners.

In New Zealand, mortgage break fees can be expensive for homeowners looking to switch lenders or pay off their mortgage early. These fees are intended to compensate the lender for the loss of future interest payments that would have been earned had the borrower continued with their current mortgage until the end of the term.

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