A Break Cost Fee (BCF) may be payable if you make repayments additional to your scheduled repayments, including repaying your loan or switching to another type of loan, while your loan interest rate is fixed.
The BCF reflects the calculated loss to the Bank, based on movements in wholesale interest rates between the date your loan commenced and the date of the additional repayment.
BCFs may be substantial. If you are considering making additional repayments, we recommend you contact the Bank to find out whether a BCF will be payable.
Repayments not subject to BCF
The Bank will waive the BCF if your total additional repayments during any year (starting from the anniversary of your fixed rate period) do not exceed 5% of the loan balance at the start of that year.
If your additional repayments exceed 5% of the loan balance at the start of the year, the BCF will apply only to the repayments in excess of this amount.
Calculation of Break Cost Fee
The BCF will be calculated as follows:
1. The proportion of your loan balance that is being repaid subject to BCF will be calculated as:
(Repayment – Tolerance) / Balance.
This proportion is calculated as a percentage to two decimal places.
2. The Bank’s loss if you fully repaid your current loan balance will be calculated as:
Balance x Years x (Rate0 – Rate1)
3. An offset based on your scheduled future loan repayments will be calculated as:
Instalment x N x (Rate0 – Rate1) x Years / 2
4. Your BCF will be calculated as:
Proportion (1) x [ Amount (2) – Amount (3)]
The BCF cannot be less than zero.
Example
A member makes an additional repayment when there are 15 months remaining on the member’s fixed rate period. The relevant interest rate swap rates at the date of repayment are:
1 year interest rate swap rate 3.20% p.a.
2 year interest rate swap rate 3.60% p.a.
Based on these rates, the Wholesale Interest Rate for a 15 month duration will be interpolated as 3.30% p.a. For this additional repayment, Rate1 will be taken as 3.30% p.a.
Years is the number of years remaining in your fixed rate period, at the date of repayment. Years is calculated as N/12 if you are making monthly repayments, N/26 for fortnightly repayments, or N/52 for weekly repayments. Years is calculated to two decimal places.
Break Cost Fee Calculation Example
The following example is provided to illustrate how a BCF is calculated using the above steps. Any BCF payable under your contract will depend on the loan details specific to the contract.
A member takes out a loan of $300,000 with a fixed rate period of three years, and a fixed rate of 7.0% p.a. The member’s scheduled repayment is $2,120 per month. After 12 months, the loan balance was $295,000. Nine months later, when the loan balance is $291,300, the member makes an additional repayment of $50,000.
During the second year of the fixed rate period, the member can repay up to 5% of the loan balance at the start of the year without a BCF applying, i.e. Tolerance is 5% of $295,000 = $14,750.
When the repayment is made, there are 15 whole months remaining on the fixed rate period, so N is 15 months and Years is 15 / 12 = 1.25.
If when the loan contract commenced, the Wholesale Interest Rate for a 3-year duration was 4.00% p.a., then Rate0 is 4.00% p.a. If at the time of the additional repayment, interest rate swap rates were 3.20% p.a. for a 1-year duration, and 3.60% p.a. for a 2-year duration, then the Wholesale Interest Rate for a 15-month duration will be interpolated as 3.30% p.a. Rate1 therefore will be 3.30% p.a.
The BCF will be calculated as follows:
1. The proportion of the loan balance that is being repaid subject to BCF is calculated as:
(Repayment – Tolerance) / Balance
= ($50,000 - $14,750) / $291,300 = 12.10%
2. The Bank’s loss if the member fully repaid their current loan balance is calculated as:
Balance x Years x (Rate0 – Rate1)
= $291,300 x 1.25 x (4.00% - 3.30%) = $2,548.88
3. The offset based on the member’s scheduled future loan repayments is calculated as:
Instalment x N x (Rate0 – Rate1) x Years/2
= $2,120 x 15 x (4.00% - 3.30%) x 1.25 / 2
= $139.13
4. The member’s BCF is calculated as:
Proportion (1) x [ Amount (2) – Amount (3)]
= 12.10% x [$2,548.88 - $139.13]
= $291.58
