Home loan fees you should be aware of

Buying a home is likely to be the most expensive purchase of your life. When you’re searching for a home loan, it’s only natural you’ll be focused on what interest rate you’re going to pay but it’s essential you also take a good look at any associated mortgage fees and charges. These can add considerably to the cost of your home loan over time and may not always be obvious.

Remember, eye-catching interest rates can sometimes be achieved by charging borrowers higher fees than other lenders. Some lenders may also add charges that you may not realise when you’re at the stage of comparing loans. To avoid this, it’s important to check a loan’s product disclosure statement (PDS) which essentially contains the fine detail and should be made available to you by law.

In a bid to help you avoid bill shock (which can be pretty difficult to avoid when you secure a new home loan anyway), here is a list of the main fees associated with taking out a mortgage.

Upfront fees

As the name implies, upfront or establishment fees cover the cost of setting up your home loan, including the processing and documentation of your loan. Most of these fees are upfront which means you have to pay them when your loan is approved. Some lenders may waive some fees in a bid to win your business although generally most lenders will charge some sort of upfront fee. Here is a rundown of what might be included.

Application fee

This can come under different names according to your lender. It may be listed as a start-up cost, set-up fee, or establishment fee. Lenders may charge an application fee when you apply for a new loan, access additional funds under an existing loan, or change the terms and conditions of your loan in some way. Depending on the lender and the amount you plan to borrow, application fees can range from as low as $150 up to $900.

Property valuation fee

This fee covers the lender’s cost to have the home you plan to buy valued by a licensed property valuer before your mortgage is approved. The valuation helps lenders assess whether the amount you are planning to pay for the home reflects what it is worth on the market. Put simply, the lender needs to know how much your property could reasonably fetch if it needed to be sold quickly.

It’s also worth noting you may have difficulty getting the loan approved if the valuation comes in considerably lower than what you were planning to pay for the home. The average cost of a property valuation is between $200-$600 although some lenders may offer free property valuations of part of a new loan deal.

Document preparation fee

This additional fee may be listed as a separate charge for some lenders. It is to cover the cost of preparing the necessary loan documents for your application. Some lenders will include it as part of the establishment or set-up fee.

Legal costs

Some lenders may pass on the legal fees they’ve incurred for preparing your formal loan documents. Legal fees can range from $200-$450 although some lenders may include them within a broader upfront fee or waive them altogether. Bear in mind, the lender’s legal fees are separate from your own legal fees for a solicitor or conveyancing service to facilitate the purchase of your property.

Settlement fees

These may be charged for arranging settlement of your loan, including organising the balance transfer to the seller of the home and the title transfer. Some lenders may include settlement costs as part of their upfront fees while others can charge from $100-$900. It’s worth noting some lenders may charge settlement fees again should there be any change to the terms and conditions of your original loan, such as topping up your current loan or should you decide to refinance during the term of your loan.

Lenders' mortgage insurance

Many lenders will require you to pay lenders mortgage insurance (LMI), a one-off insurance policy, if your loan exceeds their required loan-to-value ratio (LVR). Generally, many financial institutions will only allow you to borrow up to 80% of the property’s value. For proportions higher than that, many lenders will require you to pay for LMI to protect their interests should you are unable to service or settle your loan down the track. LMI can range from 1-5% of your home loan amount, depending on your LVR. You can use our LMI calculator to give you a general idea of the cost.

Lenders with no or low upfront fees

The lenders displayed in the table below offer home loans with no upfront fees, application fees, settlement fees, or valuation fees.

Important Information and Comparison Rate Warning

Ongoing fees

Now that we’ve got establishment or upfront fees out of the way, there are also other ongoing fees that may apply to your home loan. Again, what you pay will depend on your lender and your particular loan. There are generally two main fees to be aware of.

Monthly home loan fee

Some lenders charge a monthly fee that is meant to cover the administration and servicing of your loan. Not all loans come with monthly fees, but a surprising number of lenders still levy them. An average charge is around $10 a month. Although it may seem a relatively small charge, it’s worth considering how much monthly fees can add to the cost of a home loan over its full term. Even $10 a month adds another $3,600 to the cost of your home loan over 30 years.

Annual package fees

A package home loan is one that combines a mortgage with other banking services, usually a mortgage offset account, a savings or everyday bank account, and sometimes a credit card. One advantage of a package loan is that it may offer an ongoing discount on the interest rate of your home loan as well as the additional benefit of savings on credit card annual fees, for example. In return for the benefits, however, homeowners may have to pay an annual fee ranging from a nominal amount up to $400 a year.

Other fees

When you are considering what home loan best suits your needs, it also pays to be aware of other charges that may be incurred along the way.

Switching or break fee

Break fees may apply if you make a change to the conditions of your original loan, generally switching between a fixed and variable interest rates. A break charge can apply if you choose to exit a fixed home loan early or switch from a variable to a fixed rate. The fee is designed to cover the cost of what the bank would have received in interest compared to the new deal. There is generally no standard charge for break fees so it’s best to be aware of what fees your lender charges before you sign on the dotted line.

Redraw costs

Borrowers with a redraw facility on their home loan may be charged a fee when they make a withdrawal from the funds they have built up through extra repayments. Not all lenders charge redraw fees. Some will grant a set number of free redraws per year while others can charge up to $50 a redraw. It’s worth considering how valuable a redraw facility will be to your circumstances as some lenders may charge higher interest rates for ‘free’ redraws. Redraw facilities can help borrowers pay off their loans faster but it’s also worth checking whether an offset account may better suit your needs.

Default fee

This is a mortgage fee that will apply if there is any time you are unable to meet your minimum home loan repayment by its due date. Fees are often a flat rate - around $15-$20 - which can be charged until the outstanding amount is paid. Some lenders will extend a short grace period after the due date to allow for extenuating circumstances.

Extra repayment charges

As well as being charged for falling behind on your home loan repayments, some lenders will also charge fees if you make extra repayments not included in the terms of your home loan contract. These extra repayment fees are generally for fixed rate home loans. Some lenders may allow extra repayments up to a certain sum per year without penalty. Again, it pays to be clear on the specific terms and conditions of your loan.

Exit fees

But wait, there’s more. Even at the end of your home loan, there are still fees you may not have been expecting. Although mortgage exit fees were outlawed on new loans in 2011, loans written before that time may still attract them. Given that loans last for up to 30 years, exit fees may be around for a while yet. There are also a few other end-of-loan charges that may apply:

Discharge fees

When you’ve paid off your loan in full, your lender may require you to pay a discharge fee to cover the cost of completing your loan and the paperwork that comes with it. Discharge fees vary from lender to lender and are generally in the range of $150-$600 but can be as high as $1,000. There are a number of other scenarios when your mortgage may be discharged including when you sell your property or if you decide to refinance your home loan.

Refinancing fees

If you decide to switch to a new home loan during the term of your original loan, you will likely be charged refinancing fees. If the new refinanced loan is with the same lender, you may be able to enter into some negotiation on costs but generally, refinancing can come with a raft of fees and charges. Certainly, there are times it pays to refinance a home loan, but the costs and benefits should be carefully weighed. Refinancing costs vary greatly from lender to lender so do your homework to ensure you get the maximum benefit from taking the leap.

Is the comparison rate useful to compare home loans?

The comparison rate is a rate that should appear by law alongside the advertised interest rates for all the home loans you are considering with fee costs bundled in. The comparison rate was introduced as a loan comparison tool back in 2003 using a hypothetical loan amount and some standard fees to give borrowers a better idea of what they were really being charged, expressed as an interest rate.

Basically, the comparison rate is calculated on a $150,000 principal and interest (P&I) loan over 25 years with what were general upfront loan costs back in the day. As such, it may not be that useful when comparing modern home loans which are generally for much higher amounts and over 30-year terms. The comparison rate also doesn’t take into account all the fees and charges you may be up for, particularly those ‘other’ fees mentioned above.

Our upfront & ongoing cost calculator can give you a more accurate picture of the costs of setting up and servicing a home loan and also takes into accounts other common expenses associated with purchasing a home. Choosing a home loan that best suits your circumstances and future needs can take some research. Whichever lender and loan you choose, it certainly pays to be on the lookout for associated fees and charges before you get hit with them.

_{Photo by Jakub Żerdzicki on Unsplash}