Even if you’re no mathematician, you’re probably aware that the earlier you pay off your debt, the less interest you’ll pay overall. There may come a time during the life of your renovation loan where you find yourself able to pay the loan off more quickly. Or perhaps you’ve been able to budget and save enough to pay the loan back entirely (high five if this is you!).
Before you throw your ‘debt-free’ party, it’s important to check whether you’ll be stung with an early repayment fee for paying back your loan early. An early repayment fee, or ‘break cost’, is a penalty charged if you pay back more than your fixed monthly repayment or pay the whole loan off too early.
The whole story.
It might seem rough that you’re hit with a fee for your financial diligence, but there is a method in the madness. Early repayment fees are designed to cover the lender’s loss incurred if you end your loan early.
To fully understand why these fees are sometimes imposed, it helps to know the backstory of your loan (cue flashback music):
1. Your renovation loan is approved
2. Your lender borrows money in order to provide your loan
3. Your lender uses the interest you pay on YOUR loan in order to make payments on THEIR loan
4. You choose to repay your loan early
5. Your lender charges an early repayment fee to cover their losses caused by the interest you will no longer be paying
To fee or not to fee?
That’s a good question! It’s worth doing the sums to figure out whether you’re better off suffering the dreaded early repayment fee in order to finish your loan early. You may still be ahead of the game by reducing the amount of interest you’ll pay over the long term.
The fee is usually calculated by looking at the remaining loan balance and loan term. For example, fixed rate renovation loans often charge an “economic cost” or “fixed cost” for repaying a loan earlier than expected.
If you’re feeling unsure, call your lender to discuss the early repayment fee so that you know exactly how much you’ll be expected to pay.
The good news.
This is one fee you can avoid.
Seek out a lender who doesn’t charge an early repayment fee so you’re not penalised for your stellar efforts.
At Plenti, we believe in tailoring renovation loans to suit your unique financial situation and lifestyle. This means rewarding your strong credit history with attractive rates that are personalised to you and offering the flexibility to pay it back faster. In fact, we’ll never charge you fees or penalties for paying your loan back early.
This means you can increase your scheduled monthly repayment, make an extra payment, or pay off the loan in full at any time without being stung for extra charges.