When ASIC banned the massive home loan exit costs in July 2011, the general public assumed that changing lenders and hence home loans was quite easy. When a lender offered a low interest rate, people assumed that they can change lenders anytime without paying too much in fees.
Unfortunately, such assumptions catch many people out.
Here are five fees you need to be aware of if you are looking to refinance.
- Establishment fees
Also called ‘upfront’, ‘application’ or ‘set up’ fees, this is a one-off fee charged by your lender when you set up a loan with them. Different lenders have different options and sometimes with an offer in place, or if you choose a professional package with an annual fee and offset account, these fees are waived by your lender. So, choose wisely.
- Lenders Mortgage Insurance
This is a one off fee charged by your lender when you borrow more than 80% of your property price. Many people are not aware that this is a non-transferable fee when you decide to move lenders. So, every time you want to move to a different lender and your loan is above 80%, you will end up paying LMI.
Another tricky situation is when you decide to cross-collaterise the loan on your principal place of residence and an investment property i.e. combine the two loans together (to access equity), you may end up paying LMI twice.
- Ongoing fees
Different lenders charge ongoing fees for different products. Some of them charge a fee, either monthly or annually, in the range of $10 per month up to $33 per month when you decide to opt for a loan with an offset account and a credit card as a part of the package. Others may charge ongoing service fee when you opt for a fixed rate loan or fees when you want to ‘redraw’ the additional repayments you have made.
- Break costs on a fixed rate loan
The break fees charged on a fixed rate apparently don’t fall into the category of the banned exit fees. All lenders will charge a ‘break fee’ when you want to exit before the end of the fixed term. The size of the break fee depends on three things
a) The outstanding loan amount (the more the loan balance, the higher the break cost)
b) The time left on your fixed rate loan (the longer the time to completion, the higher the fee)
c) The fixed rate you were offered Vs the prevalent rate in the market (the higher the current fixed rate, the greater will be your exit costs)
- Early exit fees / discharge fees
Prior to July 2011, exit fees were charged by lenders in the range of $600 – $1000 if you decided to move lenders or pay off your home loan within the first 4 years. Even though ASIC banned the exit fees, lenders still charge a ‘deferred establishment’ or ‘early discharge’ fee when you decide to move on. The cost ranges from zero up to $600.
As you can see, refinancing is not just about interest rates. Rates are an important factor, but not the only one. If you choose the lowest interest rate but end up paying high application fees and ongoing fees, eventually it will all add up and you will end up paying the same as the next bank charging you a slightly higher interest rate with no ongoing or establishment fees.
It is always wise to do your homework and consider all fees before you decide to make a move.