Want to reduce the cost of your home loan? It’s not always about rate – you can have the best rate and be charged fees which actually end up costing you more in the long run. Choose a loan that charges low fees and you could save thousands of dollars over the life of your loan.
Watch out for fees
Fees and charges can change, so always check the latest information.
Your mortgage broker can help you with this!
When comparing different loans, check the fees so you know exactly how much the loan is going to cost you.
You must be told about any fees or charges before you sign up for a loan. Most lenders publish fees and charges in their product booklets, on their websites and in their credit contract.
Different lenders charge different fees. The same fee might also be called different names by different lenders.
Here are some common fees you will come across:
Also called ‘application’, ‘up-front’, ‘start-up’ or ‘set-up’ fees.
An establishment fee is a one-off payment when you start your loan. If you are not charged an establishment fee, you may pay higher ongoing fees.
Lenders’ mortgage insurance (LMI)
Before looking for properties you should confirm with the lender if a fee for LMI will be charged and how much it will be.
Lenders’ mortgage insurance, more commonly known as ‘LMI’, is a type of insurance that lenders take out to protect themselves from borrowers not being able to repay the loan.
The fee the lender charges you for LMI can be many thousands of dollars and is usually added to your home loan amount.
Lenders normally charge you a one-off fee to cover this insurance if you borrow more than 80% of the value of your home.
Whether you are charged LMI will also depend on your loan to value ratio (LVR). This is a percentage that is calculated by dividing the amount of your home loan by the purchase price (or appraised value) of the property you want to buy.
You can sometimes avoid paying LMI by saving a deposit that is more than 20% of the value of your home. If it is not possible for you to save this much, you’ll need to factor the cost of your lenders’ mortgage insurance into your loan.
Generally, the higher the equity you have in the property (or the lower the LVR), the less chance the lender will charge you a fee for LMI, and where they do, the less the fee will be.
You may get a refund of some of the LMI premium you pay if your loan is paid out in the first year or two. But if you refinance your home loan, you may have to pay a new LMI premium (especially if you are increasing your loan amount).
Also called ‘service’ or ‘administration’ fees.
They are charged every month or year for administering your loan.
Some ongoing fees may only be payable in certain circumstances. For example, you might be charged a fee to redraw any additional repayments you might have made.
Fees for breaking a fixed rate mortgage
You may be charged a ‘break’ fee if you break your fixed rate mortgage. The break fee may be very high. Generally, the more interest rates have come down since you took on the fixed rate loan, the higher the break fee will be. You won’t know how much until the lender tells you.
Early exit fees
Also called ‘early termination’, ‘deferred establishment’, ‘deferred application’ or ‘early discharge’ fees.
These may be charged if you pay out your home loan in full, within a specified period (for example, in the first 5 years). The law limits these fees to the recovery of a lenders’ loss caused by the early termination.
Exit fees on new loans were banned on 1 July 2011. Exit fees can still be charged on loans signed up before 1 July 2011 but some lenders have removed these fees from existing loans. Other lenders will pay your exit fees for you when you move your loan across to them.
Lenders are not permitted to use exit fees to discourage you from switching your loan or to punish you for doing so.
Also called ‘termination’ or ‘settlement’ fees.
These may be charged when you pay out your mortgage in full.
When you refinance your home loan you can be charged a range of fees by your new lender. Just remember that different lenders charge different fees and some may be negotiable.
You could be charged an exit fee, an establishment fee, a discharge fee and a break fee (if you were on a fixed rate loan).
Limits on interest rates and fees
By law you must not be charged more than 48% annually on your home loan (this includes any establishment or other fixed fees).
Fees can add thousands of dollars to the average 25-year mortgage. Ask your lender to explain the fees on your loan so you know what you’re in for.
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