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Explaining early repayment charges

The bank charges borrowers an early repayment charge (ERC) to recover the loss the bank incurs when a loan is partially or fully repaid earlier than agreed. 

Early repayment charges may apply to fixed home loan rates if you:

  • switch to another interest rate before the end of the fixed rate period
  • make a full or partial lump-sum payment, or
  • increase your regular minimum payments.

Why is there a charge?

When a customer takes out a fixed rate loan the bank will exchange fixed interest for floating interest in the wholesale market. This is done to match the interest it must pay on the money it borrows (from its depositors or other banks) to fund loans to customers. In return for offering the customer certainty of interest rates, the bank requires certainty of income.

Suppose a customer repays the loan before the end of its fixed rate period, and relevant wholesale rates have fallen at the time of the proposed repayment. The Bank is still committed to pay fixed interest to the depositor (or other bank) for the remainder of the fixed rate period but is no longer receiving its fixed income from the customer. The early repayment charge calculates the loss to the bank arising from this.

How is the ERC calculated?

The charge is based on three key factors:

  • the amount of the loan being repaid
  • whether the current wholesale rates are lower than the original wholesale rates at the start of the fixed rate period, and if so, by how much
  • the time left on the fixed rate period.

If you take out a longer fixed rate home loan (e.g. 5 years) you should note that if you trigger an ERC later, costs will generally be higher than if you were taking out the same loan over a shorter fixed term.

For a full description and example of the ERC calculation, refer to Clause 9 of the Facility Master Agreement. pdf 330kb

Calculate ERC in Internet Banking

Depending on your home loan type, you may be able to calculate ERC when you change your regular home loan minimum payments in Internet Banking. Log in to make a change.

When no ERC applies

  1. If you have a fixed rate home loan and are moving houses, you can avoid paying an early repayment charge by taking your home loan with you.  Talk to us about our ‘Transfer loan with home’ option
  2. On some of our fixed rate home loans, you can pay up to 5% of the loan amount at the start of your fixed term each year without early repayment charges.

Talk to us about your options

We can give you an example calculation on your loan, as if you’re breaking it on that day, and let you know what the actual early repayment charge would be.