Outside of the interest rates, bank fees are the second largest cost for most home loans. These fees can either be for the establishment of your loan, ongoing recurring fees or fees for changes to loan products, redrawing or closing your loan facility.
Discharge and fixed rate cancellation fees can stop the sale of properties, release equity purchase other properties. Here’s how you can limit any unnecessary fees for your current or next home loan.
Prior to 2011, substantial exit fees were common to reduce the economic benefit of refinancing your home loan. With government reforms designed to increase competition these fees were banned, with lenders only allowed to charge fees which would be reasonably incurred in processing a discharge of mortgage. The exception to this is with fixed rate home loans which can have substantial break fees – covering the costs of any loss in profit from the closure or refinance of a fixed rate prior to the fixed rate end date. Loans also setup prior to 2011 technically can also fall under the previous deferred establishment regime, however most lenders have moved older loan facilities under the same or similar discharge fee pricing.
To avoid early repayment fees from breaking fixed rates, be very careful in choosing a fixed rate over a variable product. Fixed rates can be locked commonly for 1-5 years, but there are also facilities which can go up to 15 years with some lenders. Only choose a fixed rate if in the foreseeable time period you would be unlikely to want to close the loan facility, refinance the fixed loan or change the facility from fixed to any other type. Also be mindful that fixed rates have a maximum amount payable per year or fixed period, so if you’re likely to receive a large sum of funds in the near future and want to put it on your home loan facility, it would likely be more beneficial to retain a variable loan. Your mortgage broker will ask you a lot of questions about your personal circumstances, answer these accurately as possible so they can guide you with the right home loan options.
Monthly and annual fees are another common fee structure with home loans. Weigh up the end available interest rate of these products vs no fee products and determine what is the most cost effective loan product overall. Some lenders will charge a single annual fee and waive or reduce any setup fees, reduce their interest rates and provide additional loan features such as offset accounts, whilst other lenders will offer basic loan products with minimal setup fees and no ongoing fees. Your broker will be able to weigh up these options to help you find the best overall product and setup for your goals, plans, loan size and feature preferences.
Lenders mortgage insurance is generally the largest fee incurred at setup for borrowers, especially first home buyers with minimal deposits. Lenders Mortgage Insurance is charged on loans where there is less than a 20% deposit or equity at the point of setup. The fee charged is an insurance fee which protects lenders in the case of negative equity when a property is repossessed, but does not protect the borrower. LMI increases exponentially with the decrease in deposit/equity – so providing any additional funds towards your deposit to get towards a 20% deposit can provide significant savings. LMI fees vary by location, property type, value and deposit, but savings can be as much as every $3 in deposit can reduce your LMI fees by $1.
If you would like to find out the right loan product for you to minimise any excessive fees and balance a cost effective interest rate, contact Perth Broker today.