When you are looking for a home loan, the interest rate is an important consideration affecting the total cost of the loan to you. However, it is not the only factor you should consider when selecting the right home loan. For instance, some home loans may advertise a very low interest rate but end up costing you more over the entire term, due to the high fees charged by the lender. It is, therefore, important to understand the various types of home loan fees charged by lenders to make an informed choice when comparing home loans.
What are the various home loan fees charged by lenders?
Home loan fees can be divided into upfront, ongoing and exit fees. Over time, these fees can cost you thousands of dollars, and it’s worth comparing both interest rates and fees when shopping around for a home loan.
Upfront fees
Upfront fees refer to one-time costs charged by your lender when you take out a loan. These can include:
1. Application fees
Application fee is a one-time payment charged by lenders for processing your home loan documentation. Depending on your lender and the size of your loan, the application fee can go up to a few hundred dollars. However, you might find some lenders who’ll waive this fee for you, and it’s worth comparing home loans to check for areas you can save some money.
2. Legal and conveyancing fees
Conveyancing refers to the process of transferring the legal title of a property from the seller to the buyer, that is, you. This process is handled by a legal professional (a solicitor or a conveyancer) who’ll typically charge you a fixed fee that could depend on the price of your property. In general, you could pay up to $2,000 in conveyancing fees. Additionally, you might need to pay a legal professional to arrange for various legal documents, like sale contracts and settlement agreements.
3. Valuation fees
A lender charges a valuation fee for commissioning a valuation of your property. The purpose of the valuation is to determine the suitability of the property you wish to purchase as a security for the loan. Even though there’s no fixed fee for a valuation, it could cost you up to $500 (or a little more), depending on your type of property, its location and value.
4. Building and pest inspections
It’s important to hire a professional inspector to check the structure of the property you wish to buy for any defects or pest infestations. A building and pest inspection may cost you between $500 to a couple of thousand dollars. However, it’s advisable not to skip this cost. A building and pest inspection can help you discover major defects in the property that could cost you a lot of money to repair later.
5. Lender’s mortgage insurance (LMI)
Lender’s mortgage insurance or LMI refers to a type of insurance that protects the lender’s interest in case you (the borrower) default on your home loan repayments. LMI premium can cost you a few thousand dollars, depending on the size of your loan, but it enables you to borrow money with a less than 20% deposit.
Depending on your lender, you may need to pay the cost of the LMI premium upfront or roll it over into your loan amount. It’s important to remember that LMI doesn’t protect you in the case of default but only protects the lender.
6. Stamp duty
Apart from your lender’s upfront costs, certain charges are payable to the government when you buy a property, such as a stamp duty, which is one of the biggest upfront costs associated with a home loan. You can visit your state or territory government’s revenue website to learn more about the stamp duty payable on your purchase and any exemptions you may be eligible for.
Ongoing costs
Besides the one-time charges associated with a home loan, you’re also required to pay some ongoing charges to your lender when you take out a home loan. These include:
1. Annual fees
Annual fees are generally payable when you take out a mortgage as a part of a package deal. Home loans with promotional interest rates or discounts might also charge you an annual fee.
2. Monthly account-keeping fees
Account-keeping fees are charged by your lender for loan administration and servicing and could cost up to $15 a month.
Besides monthly account-keeping fees, your lender may charge you a fee for the various features you use with your home loan. For instance, there may be an additional charge each time you withdraw money using the redraw facility. Or, you might pay extra fees (or even a higher interest rate) for using a 100% offset account facility with your home loan.
In a nutshell, it is worth considering the features you need in your mortgage and how much you’ll pay to use them to decide on the right type of home loan for you. A mortgage broker can explain the various home loan features to you in detail and how they may be useful, enabling you to make an informed choice.
3. Late payment fee
While this is not exactly an ongoing fee, you’re likely to be charged a late payment fee if you delay your home loan repayments. Late payments can also be noted on your credit file, potentially leading to a lower credit score, which is why it’s important to budget for your repayments to avoid such penalties.
Exit fees
Your lender will likely charge you some fee at the end of your mortgage. Discharge fee is generally payable at the end of the term to cover the cost of various discharge-related documentation. It may cost you up to $500.
It’s also possible that sometime during the loan term, you feel your home loan is no longer right for you and plan to switch to another lender. Doing so will see you paying additional fees, including documentation and legal fees for both loans and settlement fees for your existing loan. If you’re breaking a fixed-interest mortgage, you’re likely to be charged break costs that can amount to a few thousand dollars, depending on your lender and the size of your loan.
Clearly, home loan fees can cost you thousands of dollars over the life of your loan. It is, therefore, advisable to compare both interest rates and fees charged by various lenders to find a competitive deal for yourself. You can do this by checking the comparison rate, which is a figure that considers both the interest rate and some of the upfront and ongoing fees charged on the loan. However, comparison rates are often calculated for a $150,000 loan, and the average mortgage size is much larger. To get a better estimate, consider using a comparison rate calculator or an example closer to your situation to understand how much a loan will actually cost you. A mortgage broker could help you crunch the numbers to find a competitive deal with the right features for your situation. Your broker could even negotiate with lenders to waive some of the fees, especially if you’re a low-risk borrower with a good credit score.
