When looking for a home loan, most people focus on finding the lowest interest rate. But what you might not know is that fees also play a big part in how much you will pay over the life of the loan.
There are upfront costs that lenders have to pay during the application process to establish the loan. Different lenders can choose to pass these on in different ways or to cover the cost themselves.
Fees can be paid at different times during the application process either as it reaches certain milestones like valuation stage or at settlement. Be sure to ask when they will be charged and if they are refundable if the loan doesn’t proceed.
This is the amount paid for a qualified independent valuer to inspect the property and produce a report covering a number of elements as required by the lender. This is to help determine if the property is a suitable security for the loan and includes things like general repair, risk factors which may impact the value, how readily saleable the property would be etc.
The cost usually starts at around $220 and can be much more depending on:
- The value of the property – typically properties valued at over $1m can incur a higher fee.
- Type of property - obscure type of title or whether it is commercial or residential zoned.
- Location – the further the valuer has to travel to inspect the property the more you will be charged. Rural or remote locations outside major residential hubs can incur higher fees.
If a valuation fee is charged by a lender, find out if it is at cost or a flat fee. If it is at cost, insist on a quote prior to proceeding so you know exactly how much you will be up for.
There are two types of legal costs, one for the lender and one for you as the borrower.
- Lender legal costs. This includes the cost for the lenders legal representative to draw up the loan contract, check them when they are returned, and to attend settlement on behalf of the lender. Can be between $250 to $500.
- Your own legal costs. If you are purchasing you may also have the cost of your own solicitor or conveyancer. If you are refinancing you may choose to get legal advice when signing your loan contracts and thus incur a legal cost.
Lenders sometimes take out this insurance to protect against any issues that may arise with the title.
Instead of charging all the above fees separately, some lender choose to charge a flat fee to cover them. Sometimes called an establishment fee, it is usually around $600. Some lenders will choose to pass this on while others will choose to waive it if they are offering a special or the loan is under a professional package that comes with an annual fee.
Are these fees avoidable?
Yes and no. There can often be a trade-off between interest rates and other benefits, and fees. Add them all into the mix when comparing loans. A Key Facts Sheet can give you a snapshot of your loan amount with the fees added in, giving a total cost for the life of the loan as well as a personalised comparison rate. Use this to compare different loans side by side. Click here to generate a Key Facts Sheet on a State Custodians loan.
Lenders Mortgage Insurance
Lenders mortgage insurance (LMI) is insurance that lenders take out when they lend more than 80% of the value of the property to help share the increased risk that comes with lending so close to the value of the property. It is a one off premium that is passed onto the borrower and usually added to the loan.
It is designed to cover the shortfall should you default and the sale of the property is not be enough to cover the outstanding debt. This can happen if it doesn’t sell for what it was valued for or be enough to cover default fees and interest. It protects the lender not the individual borrower.
The higher your lending percentage compared to the value of the property, the more this cost will be and can add to thousands of dollars.
Did You Know?
You can avoid LMI with a 20% deposit or have a guarantor. Click here to find out about how your parents may be able to help you.
LMI premiums will vary for different lenders as it is a premium that is negotiated between the individual lenders and the mortgage insurer. Make sure you get a quote and compare. If you are borrowing more than 88% of the value of the property, the premium will increase dramatically. To get an idea of what it might be, click here.
Mortgage registration and transfer fees
When you take out a home loan for the purchase of a property or refinance an existing home loan, there are two state government registration fees that are charged. These include:-
- Title registration – if you are purchasing a property, this is the fee to register you as owner and the bank as the mortgagor on the title of the property.
- Mortgage registration and transfer – for refinancing you pay for the mortgage to be transferred and re-registered with the new lender recorded on it. For purchases you will pay for the existing lender for the existing owner to be removed and a registration fee for your lender to be registered.
Stamp duty is one of the biggest costs when it comes to buying a property and taking out a home loan. It is a state government tax and is usually paid at or prior to settlement.
The amount payable is determined by the size of the loan and will vary from state to state
Calculate stamp duty
Work out what your stamp duty, mortgage registration and transfer fees with our Stamp Duty Calculator
Rate lock fee
As fixed rates can change more frequently than variable rates, the fixed rate you applied for may not be the current fixed rate when the loan settles. By paying this fee you can lock in the fixed rate for a period of time, usually 60 days, until settlement. It is often made up of a flat fee and/or a percentage of the loan.
Monthly or annual fees
These can also be called account keeping or account administration fees. They are usually charged either as either:-
- Monthly fees
- Annual fees
When a loan has ongoing fees like these they are usually paid to get something in return. This can be a discounted interest rate, fee free credit card or transaction account, offset account or discounts on insurance products etc.
To work out whether it is worthwhile incurring these fees, you need to calculate the benefit for your loan amount. For example:
- How much interest will you save with the lower rate? Will this be more than the cost of the fee per year or for the next 5 years?
- What is the value of the added benefits?
- If it is an offset account, work out how much you could potentially be holding in it and how much interest it would save you. Could you achieve the same with paying extra into the loan and redrawing when you need to?
- If it is fee free credit card or discounted insurance, work out the saving and compare it to the fee.
Did You Know?
An offset account is one of the features that often come with loans with an annual fee. But did you know that there are basic loans that have an offset account without an annual fee? Click here for the State Custodians Breathe Easy Loan that does not have any ongoing fees but still has a 100% offset account.
Fixed rate break fees
These usually apply during the fixed rate period. The fee is calculated by comparing the fixed rate with the current variable rate, and the remaining fixed term. If the variable rate has dropped significantly it may amount to thousands of dollars. There are several reasons why it can be incurred:
- Refinancing to a different home loan, for example if variable rates fell dramatically below your fixed rate
- Making extra repayments beyond what is allowed while the rate is fixed
- Selling the property as your plans have changed
Late payment fee
Also called a dishonour fee, it is charged if there are insufficient funds in your account when the repayment direct debit occurs. This should be avoided, so you could schedule the repayment to occur a few days after your pay goes into your account or set a reminder to ensure that the funds are there.
Arrears management fee
If you have fallen behind with your repayments, lenders may charge a monthly fee and possibly the interest rate may be increased as well.
Fees for features
Home loan features can help make your home loan more flexible and save money, however some lenders will charge you to use certain features. Some include:
- Additional repayments: Some lenders may allow you to make extra repayments on your home loan, but they could charge you every time you do so, which could outweigh the benefit of repaying extra.
- Redraw: Some lenders may also charge you to redraw extra money you have put towards your home loan. Some have free electronic redraw but an over the counter redraw.
- Offset account: Some lenders can charge a one off fee or ongoing fee to have an offset account.
- Fee free transactions: There may be a limit on the number of transactions you can do for free on your home loan or offset account. A fee can apply if you do more than this.
Some loans allow you to sell the property and purchase a new one while keeping the loan the same. There are often fees to value the new property and change the loan contract. If you think you may want to use this feature, ensure you find out about how it works and any limitations.
If you want to increase your home loan to fund something else like a new car or renovations, there are fees to do this including valuation and legal fee for changes to the loan contract.
This may also be called a termination or settlement fee and may be charged when your home loan is repaid in full. Depending on the lender the fee could range from $200 to $800.
Interest accrued but not yet paid
A lot of people forget that interest is calculated daily but is charged monthly, usually in arrears. This means that the interest you pay this month will be for the month that has just passed. When you discharge the loan, it can be between the normal interest cycle, so there will be interest for a part month which hasn’t been charged to you yet. You need to budget for this when the loan is paid out and not just look at the balance owing.
When you are refinancing it is important to work out if you will be better off with a cheaper rate. The costs involved need to be deducted from the savings you will have each year. Sometimes it can take years to be ahead so refinancing should only be done with caution. Some fees will include:
- Setup fees for the new loan.
- Discharge fees to close down your current loan.
- Break costs if you are currently within the fixed rate period of your home loan.
- Mortgage registration and transfer fees may be charged by the Government to remove the old lender and register the new one.
- Lender Mortgage Insurance could be charged if your loan amount is above 80% of the value of the property.
If you’re not sure about what fees will affect your home loan, we can help. The team at State Custodians can provide you with the right information about what fees apply to our home loans and discuss your options with you one on one. To chat to our friendly team, give us a call on 13 72 62 or leave your details here and they will contact you.