Fierce competition between lenders has prompted the proliferation of various mortgage products and an even greater array of fees, rates and features accompanying them. We show you how to minimise the charges and avoid being stung by the extra expenses
First homebuyers often underestimate the total cost of buying a home. The government and lender fees involved in establishing your home loan can easily add up to 6–8% of the cost of your property.
The best way to eliminate or minimise these costs is to be aware of what’s involved in the home loan fee process and select a product with a cost-effective fee structure.
Peter Hall, country executive and director of Genworth Financial, says that due to the myriad of options now available borrowers need to be discerning when choosing a loan.
“Fees vary according to the loan product you’re applying for and the features that suit your individual circumstances,” he says. “It’s important for borrowers to fully understand all the features available on their loan, as well as any fees and charges that may apply.”
So, what are these fees and, more importantly, how can we avoid them?
The loan establishment fee is also known as an application fee or upfront fee – and it can be hefty. Expect to pay absolutely nothing or as much as $1,600 in start-up costs, which include the costs of setting up the loan, conducting a valuation and producing the required legal documents.
The fee may or may not be refundable if your application is unsuccessful. It’s vital that you find out right at the start all the upfront costs your lender will be charging you.
Lenders mortgage insurance
If you’re borrowing more than 80% of the value of your property, expect to pay a one-off mortgage insurance fee. This fee is called lenders mortgage insurance (LMI), and its purpose is to protect the lender in case the borrower defaults. Fees vary depending on the loan amount and loan to value ratio, but they generally amount to thousands of dollars.
One way you can avoid paying LMI is to save a deposit larger than 20%. The more money you have saved, the less you have to borrow.
Stamp duty is a big cost. It’s charged to homebuyers by state governments and is calculated on the purchase price of your property. Some Australian states and territories offer full or partial stamp duty exemptions for first homebuyers and different rates for owner-occupied and residential investment properties.
Extra repayment fees
While most loans these days allow you to make extra repayments, some loan products charge an additional repayment fee if you make a lump sum repayment on your home loan. This is generally applied to fixed rates and some basic variable rate loans. If you’re in a position to make additional repayments at some point, it’s important that you ask about extra repayment fees when you’re applying for a home loan.
Redraw facilities are probably one of the most widely used loan features. They allow you to access additional repayments paid into your loan.
Before you even access a redraw facility, some lenders charge you for simply activating this facility; others offer the features free of charge. Some lenders will limit the number of free redraws that you can make. Once you’ve used the quota of free redraws, you can be charged a fee, typically between $10 and $50, for each extra redraw.
Late payment fees
The late payment fee may be charged in the form of a higher interest rate on the outstanding amount or a flat fee. It may be charged immediately or after a set period of time. Needless to say, avoiding this fee is just a question of timing.
Combination loan fee
Most lenders allow borrowers to take out a combination or split loan where the loan amount is split between a variable and a fixed interest rate.
Not all lenders charge a fee for this, but, if they do, it will be called the combination loan fee and ranges between $50 and $250. The best way to avoid this is to make sure you can split your loan at no cost when signing up for a mortgage.
Ongoing fees are account keeping fees, charged at regular intervals, which range between $5 and $15 per month. A lot of non-bank lenders don’t charge them, so make sure you shop around.
These fees cover some of the lenders’ costs of making and administering loans, including producing statements and other ongoing loan documentation.
Break cost or exit fees are charged when a borrower leaves a fixed rate loan before the end of the fixed period.
A flat fee can be charged or the penalty calculated based on the number of months the fixed rate remains to be paid.
Break costs vary between lenders, so make sure you ask about them if you’re considering a fixed rate loan.
Another hefty cost that needs to be considered is the deferred establishment fee, which is a broad and vague term that can cover a multitude of exit costs.
Other terms include early redemption charges, administration charges, sealing fees and discharge fees.
Any fee jargon like this in small print should set off alarm bells and you should ask the lender for clarification, preferably in writing, of exactly what it might cost you based on your particular situation.
Engaging the experts
While borrowers can do the legwork on their own, it can be a time-consuming exercise trawling through various offerings – trying to haggle down rates and fees or getting them waived.
Engaging a mortgage broker can be invaluable, particularly for first homebuyers. “A broker has the experience and knowledge about the loan application process and has developed good relationships with various lenders,” says Nicholas Gruen, CEO of Peach Home Loans. “Brokers have no fees and are funded through commissions from lenders.”
Some brokers, such as Peach Home Loans and Mates Rates, even offer some form of refund to their clients in the form of rebates due to lower margins.
Planning is also the key to avoid the mortgage fee trap. If you’re thinking about upgrading to a bigger house or upscaling your area in a few years, choose a portable loan or one with low or no exit period penalties.
Portable loans enable you to transfer the loan to the new property. This saves you exit penalties on one house and establishment costs on the next.
You may decide to refinance your loan down the track if circumstances change or you find a better deal elsewhere. If you do, take into consideration the time it may take to recoup these costs.
On a standard loan transfer, exit fees and establishment fees – including application fees, legal fees and valuation fees – can range from $1,000 to $10,000, which can take months or even years to recover.
While you’ll never be able to escape fees entirely, making a plan for your financial future can help you identify which loan will suit you best.