The federal government’s proposal to scrap exit fees is a double-edged sword for consumers.
On the one hand, cutting exit fees makes it easier for borrowers to move their loan to another lender offering lower interest rates. But on the other, pressure to keep rates low will be diminished if non-banks are crippled by a total exit fee ban.
As well, several banking critics argue that should the government abolish these fees, banks will find a different way to collect the money either through higher upfront fees or increased interest rates.
To better understand the argument, borrowers need to take a closer look at the fees. Exit fees break down into three categories. The first set are known as mortgage discharge fees, which banks charge borrowers for finalizing a mortgage when the loan is paid out or moved to another institution. These generally cost around $350. In addition, each state and territory charges a separate fee to either register a new mortgage or discharge an existing one.
The second set of exit fees are actually deferred application fees. Sometimes lenders will waive application fees or provide a cheaper interest rate if the borrower agrees to keep the loan with the institution usually for a set period - typically four years. These fees range from $700 to $1000. Some lenders, such as credit unions and building societies, take a tiered approach to these fees – charging $1,200 if the loan contract is broken in the first year, $900 the second, and so forth.
And lastly, the most expensive exit fees are the penalties borrowers pay for breaking a fixed rate loan, which - depending on the size the loan, the length of time remaining on the fixed-rate term and the rate that was locked in – could reach as high as $50,000.
Any changes to exit fees would not be implemented until July 1, 2011. But for consumers looking to secure a home loan in the next six months, the best decision they can make is to thoroughly research the home loan market.
If you want to avoid exit fees, take a hard look at your future plans before you sign with a lender. There are many reasons why you might want to exit your loan before the standard four-year period – you may need to trade up to accommodate a growing family, sell the house to move overseas, refinance to a cheaper rate, move because of a job change, or get a divorce. If there is a slight possibility that any of these life changes could pop up, then it is necessary to take a good look at the exit fee policies associated with the lender and product.
Another valuable source of information is www.yourmortgage.com.au, which updates mortgage interest rates daily, provides several different calculators – including basic repayment, stamp duty, negative gearing and borrowing amounts, as well as contacts with mortgage brokers Australia-wide.