Understand These Fees For A Better Home Loan

Following the recent RBA cash rate cuts, banks have been reducing their advertised rates on home loan products – but don’t be fooled. If you’re in the market for a new home, the lowest advertised rate does not always mean the lowest cost. Here are four ‘hidden’ fees to watch out for.

There are a variety of fees, conditions and charges that apply to home loan products, so as consumers we need to either:

1. take it upon ourselves to do thorough research into the total cost, or
2. hire a financial broker that can calculate this for us

Either way, it’s essential to look beyond the advertised rate, and find out the actual cost of the home loan you’re applying for.

Here are five of the most common bank fees and charges to look out for on low interest home loans, so you can make the right decision for your needs.

1. Ongoing fees

Ongoing fees, also known as account fees, are most typically associated with financial products and are often in plain sight. You can see these fees advertised on the web page of the loan product you’re applying for, or even in their own advertising.

Charged monthly or annually, ongoing fees are collected by lenders to account for the ongoing maintenance of your account. Also called ‘service’ or ‘administration’ fees, not all lenders will charge them.

Insider Tip: If your home loan lender has no ongoing fees, make sure you check the Product Disclosure Statement, and any other fees and charges documents. They may recoup their losses from no or low ongoing fees by charging higher fees in other areas.

These five credit cards are an example of this, with no ongoing fees and 0% balance transfer fee for the first 12 months, useful if you’re looking to consolidate your credit card debt that may have a particularly high interest rate:

2. Legal Fees

While there are some do-it-yourself conveyancing kits on the market, it’s often a good idea to consider engaging a professional when it comes to managing legal documents for your loan.

For large personal loans and home loans, it’s generally a good idea that you engage either a solicitor or a conveyancer. A conveyancer is likely to be cheaper, however, this can be a disadvantage as they are more restricted in the advice they can give you.

Before you take out a home loan, shop around for a conveyancer or solicitor that you trust can help with everything you need to know to get the best deal.

Here are some of the lowest rate home loans, compared:

3. Upfront Fees

An ‘upfront’ or ‘application’ fee is a one-off expense your bank may charge when you take out a loan. These fees can apply to home loans, car loans, personal loans and even credit cards.

Also known as establishment, start-up or set-up fees, the average start-up fee is over $570 for a home loan, however there are many mortgage products on the market with none at all. If the home loan you want does include an application fee, you can try and negotiate with the lender to have it waived.

Let’s say for instance, you take out a $500,000 loan and there is an application fee of $2000. You can either pay this directly to the bank upon application, or, the bank can add this onto your loan amount to take your total to $502,000.

If you decide to add the fee onto your loan amount, remember that you will pay interest on the $2000. If, however, you pay the application fee directly, or via an offset account, it will be interest-free fee.

Many unsecured personal loans will have high upfront fees, and can either be expressed as a percentage of the loan amount, usually between 2-6%, or as a figure ranging from around $100 – $600.

Insider Tip: Some banks will consider dropping the application fee in order to win your business, so make sure to ask your broker or bank if they can waive this fee for you. All lenders are different, so make sure you check the Product Disclose Statement (PDS) to find the best loan for you.

4. Discharge / Administration Fees

Prior to July 2011, if you wanted to exit your home loan early you would be charged a “discharge fee”. This would ensure the lender could recoup the interest they would miss out on for the remainder of the loan term.

Say, for instance, you had a $500,000 home loan. You had a 5.6% fixed interest rate and a loan term 30 years, but you suddenly won the lottery and decided to pay off the rest. You still had $250,000 outstanding on your mortgage, so if you paid the entire debt off at once, your lender would miss out on $14,000 in interest.

Whilst discharge fees are no longer legal, there is often an administration fee of around $300 or so that will be charged when you either refinance your home loan with a new lender, or decide to pay off your mortgage earlier than agreed.

Insider Tip: If you are looking at fixed rate mortgages whilst the interest rates are at a record low, make sure you check for any early exit fees or early repayment fees in their PDS. The benefits of a fixed interest rate are that you have stable repayments, but one of the caveats is that lenders charge high fees when you try to exit early.

Refinancing: can the banks waive your fees?

If you’re lucky, you could be offered a promotional deal from your lender when you refinance your mortgage. Many lenders will offer refinancers $0 application fees to encourage you to switch your home loan.

If you are comparing lenders when refinancing your home, make sure that you compare all fees, charges, benefits and features before you switch.

Be cautious to check if any additional fees charged on the loan, such as early exit fees or legal fees, as the lender may be looking to recoup their loss with other charges.