Fixed Rate Break Cost Calculator
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Reviewed by Calculator Editorial Team
A fixed rate break occurs when a lender offers a lower interest rate for a specific period, typically 1-5 years, before reverting to the original rate. This calculator helps you determine the cost of taking a fixed rate break compared to continuing with the original rate.
What is a Fixed Rate Break?
A fixed rate break is a temporary reduction in the interest rate on your mortgage or loan. Lenders often offer these breaks to attract borrowers, but they come with costs that need to be carefully evaluated.
Key characteristics of fixed rate breaks include:
- Temporary reduction in interest rate
- Usually lasts 1-5 years
- May require early repayment penalties
- Can affect your overall loan cost
Important Note
Fixed rate breaks are not available on all loans. Check with your lender to see if this option is available to you.
How to Calculate Break Cost
The cost of a fixed rate break can be calculated by comparing the total interest paid under two scenarios:
- Taking the fixed rate break
- Continuing with the original rate
The difference in total interest paid represents the cost of the break.
Formula
Break Cost = (Total Interest with Original Rate) - (Total Interest with Fixed Rate Break)
To calculate the total interest for each scenario, you'll need to know:
- Original loan amount
- Original interest rate
- Fixed rate break amount
- Duration of the break
- Total loan term
Example Calculation
Let's look at an example to illustrate how to calculate the cost of a fixed rate break.
Example Scenario
Loan Amount: $200,000
Original Rate: 5% (5-year term)
Fixed Rate Break: 3% for 2 years
Total Loan Term: 5 years
Using the calculator above, you can determine that taking the fixed rate break would cost you approximately $1,200 more in interest over the life of the loan compared to continuing with the original rate.
Impact on Your Payments
The fixed rate break can significantly reduce your monthly payments during the break period, but this comes with several considerations:
| Scenario | Monthly Payment | Total Interest |
|---|---|---|
| Original Rate (5%) | $1,264.15 | $126,415 |
| Fixed Rate Break (3% for 2 years) | $870.19 (first 2 years) | $127,615 |
As shown in the table, while the monthly payment is significantly lower during the break period, the total interest paid is actually higher than if you had continued with the original rate.
FAQ
Is a fixed rate break always a good idea?
Not necessarily. While the break reduces your monthly payments, it may increase your total interest cost. You should compare both scenarios to make an informed decision.
Are there any penalties for taking a fixed rate break?
Yes, many lenders charge early repayment penalties if you take a fixed rate break before the end of the original term. Be sure to factor these costs into your decision.
How do I know if a fixed rate break is right for me?
Use our calculator to compare the cost of taking the break versus continuing with the original rate. Consider your financial situation and whether the reduced payments are worth the increased total interest cost.