Why breaking a fixed rate loan wasn't a mistake‍

A fixed rate locks your interest rate in place for a set period, no matter what the market does. You know exactly what you'll pay each month. The trade-off is you don't benefit if rates fall, and if you want out early, you usually pay an exit fee to break the agreement.

I fixed at 5% for five years in 2018. At the time that wasn't a bad call. Pricing was known, and the commentary going around was that rates were heading up, not down. Fixing felt like protection against exactly that.

A couple of years in, the reasoning behind the loan hadn't changed, but my circumstances had. The structure around it, my dad on the title as he headed into retirement, my mum's guarantee still tied up through her own investment property, was standing between me and a purchase I was actually ready to make. I had the deposit sorted and the serviceability worked out. What I didn't have was a structure that let me act on it.

Breaking the loan cost $13,000 in exit and restructure fees. On its own, that looks like a straightforward loss. Given why I'd fixed in the first place, it would've been easy to treat the rate as untouchable and just wait it out.

I'll be honest, at the time I had no idea rates were about to fall the way they did. It's tempting to read this back now and think the call was obviously right. It wasn't obvious then. What I did know was the structure was blocking a real purchase, not a hoped-for one, and $13,000 was a bounded cost against an open-ended one. Breaking the loan separated the transaction from my dad, released my mum's guarantee, and within six months I'd released about $100,000 in equity and settled the next purchase, before the original fixed term would even have expired. Rates then dropped hard through COVID, consumer rates down to around 2% against a cash rate near 0.1%, so the rate I'd broken wasn't even competitive by the time it would have ended anyway. That was a bonus. It wasn't the reason.

What actually mattered:

• Fixing a rate is a decision made with the information you have at the time. It isn't a promise to ignore new information later.
• The exit fee is the visible cost. The invisible one is the opportunity you can't take while the structure stays as it is, and that only counts if the opportunity's real, not something you're hoping shows up.
• A bounded, one-off cost is usually cheaper than an open-ended one. $13,000 is bounded. A missed purchase you're actually ready for isn't.
• The real question isn't what breaking the loan costs. It's whether there's a specific, ready-to-go purchase this structure is stopping you from making right now. If the answer's no, the fee usually isn't worth it.

This isn't an argument for breaking every fixed rate loan early. Most of the time there's nothing waiting on the other side, so the fee just costs you money. The filter only matters when a real opportunity is sitting there and the structure's in the way.

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Disclaimer: The information in this article is general in nature and does not take into account your personal objectives, financial situation, or needs. It is not financial, legal, or tax advice. The Nelis Group accepts no liability for actions taken based on this content. You should seek independent advice from a relevant licensed professional before making any decisions and always confirm the latest rules and thresholds with your state revenue office or relevant authority.