Break cost

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-01

// THE SHORT ANSWER

A break cost is the charge for repaying fixed-rate money before the end of its fixed period. When the rate was fixed the bank arranged its own funding or hedging at that rate for the whole term, and if wholesale rates have fallen since, unwinding that position costs it money; the break cost passes that loss to the borrower. It is a cost of refinancing rather than a penalty, and it can be nothing or a great deal depending on where rates have moved — which is why the facility agreement is read before the new bank's offer is accepted.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.