What fee traps mortgage holders should be aware of
To entice borrowers seeking to buy or refinance, banks have been reducing their advertised home loan rates – for starters don’t be fooled as the lowest rates tend be associated with products with limited features or designed to ensure that you stay with that lender for a certain period (fixed rate loans).
If you're in the market for a new home or want to refinance to a better rate and save money, the lowest advertised rate does not always mean the lowest cost. Before we get to the fees, there is another low rate loan that you need to be wary of, ‘Introductory Rate’ offers, these loans typically have ridiculously low rate for say, 12 months before reverting to a very uncompetitive rate.
Back to the fees, there are a variety, together with conditions and charges that apply to home loan products, so as consumers we need to do thorough research into the total cost.
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 four 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 and are often in plain sight but either misunderstood or overlooked by borrowers. Sometimes called 'package' or 'account management' fees, and not all lenders will charge them.
Charged monthly or annually, ongoing fees are collected by lenders to account for the ongoing maintenance of your account or giving you access to a feature that likely to help you reduce your interest repayment e.g. offset accounts.
Tip: If your home loan lender has ongoing fees, make sure that the benefits you get equals what you are paying for. For example, lenders often claim package fees entitles you to discounted rates, credit card annual fee waiver and offset accounts.
In reality, you could get a similar card to what the lender gives as part of the package from another lender for a lower annual fee, and if you aren’t going to have a running balance of at least $10,000 in your offset and/ or don’t have future plans to turn your property into an investment, you’re better off with the free redraw facility that comes with basic home loans.
2. Legal Fees
While there are some do-it-yourself conveyancing kits on the market, it's not a good idea. You’re better off engaging a professional when it comes to managing legal documents for your loan.
When purchasing a home, 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.
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 $600 for a home loan, however it’s a competitive market. 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 $600. 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 $50,600.
If you decide to add the fee onto your loan amount, remember that you will pay interest on the $600. If, however, you pay the application fee directly it will be interest-free fee.
Tip: Some banks will consider dropping the application fee in order to win your business, so make sure to try and have these waived 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 $350 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 the agreed term.
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.
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 of unreasonable amount is being 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.
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This article does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.