Paying Off Fixed Term Loans Early? Here's How to Save

If you're one of the many Australians locked into a fixed term loan, you might be wondering if it's possible to pay off your loan early and what the implications might be. Whether you're aiming to reduce your debt burden sooner, save on interest, or simply gain more financial freedom, paying off a fixed term loan early can seem like an attractive option. However, there are important factors and potential costs to consider before making this decision.

Understanding Fixed Term Loans

Fixed term loans are a popular choice among borrowers who seek stability and predictability in their repayment schedules. When you opt for a fixed term loan, your interest rate is locked in for a specified period, typically ranging from one to five years. This means your repayments will remain constant throughout the fixed term, regardless of fluctuations in the market interest rates.

The primary advantage of a fixed term loan is the certainty it provides. Knowing exactly how much you'll pay each month can help with budgeting and financial planning. However, this stability comes with a trade-off: limited flexibility. Most fixed term loans include conditions or penalties for repaying the loan early, known as break costs or early repayment fees.

Key Information About Paying Off Fixed Term Loans Early

Before deciding to pay off your fixed term loan early, it's essential to understand the potential costs and benefits. The most significant factor to consider is the break cost, a fee charged by lenders to compensate for the loss of interest they would have earned over the loan's remaining term.

These break costs can vary significantly depending on the lender, the remaining term of the loan, the original interest rate, and current market rates. Here's a closer look at how these costs might compare:

As shown in the table above, break costs can be calculated in different ways, which is why it's crucial to check the specific terms of your loan agreement or consult with a professional. At Esteb and Co, we have access to 83+ lenders, which means we can help you navigate these complexities to find the most favourable terms.

Steps to Pay Off Your Fixed Term Loan Early

If you've weighed the pros and cons and decided that paying off your fixed term loan early is the right choice for you, here's a step-by-step guide to help you through the process:

1. Review Your Loan Agreement: Start by examining the terms and conditions of your loan. Look for any mention of break costs or early repayment fees.
2. Calculate the Potential Costs: Use the information in your loan agreement to estimate the break costs. You might also want to consult with your lender or a mortgage broker to get a precise figure.
3. Weigh the Costs Against the Benefits: Consider whether the potential savings on interest outweigh the break costs. Use an online calculator to see the long-term financial impact of paying off your loan early.
4. Consult with a Professional: Before making a final decision, discuss your plans with a mortgage broker from Esteb and Co. They can provide insights and potentially negotiate better terms with lenders.
5. Notify Your Lender: If you decide to proceed, inform your lender of your intent to pay off the loan early. They will provide the necessary paperwork and instructions.
6. Make the Payment: Follow your lender's instructions to make the early repayment. Ensure you receive confirmation that the loan has been settled.

Tips and Considerations

Here are some expert tips to consider when paying off your fixed term loan early:

• Timing is Everything: Consider waiting until the fixed term is close to ending, as break costs tend to decrease over time.
• Partial Repayments: Some lenders allow for extra payments or partial repayments without incurring fees. Check if this option is available with your loan.
• Refinancing Options: Refinancing to a loan with more flexible terms might be a better option if break costs are too high.
• Emergency Fund: Ensure you have a sufficient emergency fund before using extra funds to repay your loan.
• Tax Implications: Consult with a tax advisor to understand any potential tax implications of early repayment.

Frequently Asked Questions

1. What happens if I want to pay off my fixed term loan early?
   Paying off your fixed term loan early may incur break costs, which vary depending on the lender and loan terms.
2. Can I negotiate break costs with my lender?
   In some cases, you might be able to negotiate lower break costs, especially if you're refinancing with the same lender.
3. Are there any benefits to paying off my loan early?
   Yes, potential benefits include saving on interest, reducing debt burden, and gaining financial freedom.
4. How do break costs work?
   Break costs are typically calculated based on the difference between the original and current interest rates, multiplied by the remaining loan term.
5. Is refinancing a better option than early repayment?
   Refinancing can be a viable alternative if it offers more favourable terms and lower associated costs.