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Home Loans Fees & Charges - Explained
Fees and charges are often the deciding factors that sway people to choose one loan over another. While low interest rates and useful features are splashed across the headlines of most mortgage advertisements, the applicable fees and charges are typically relegated to the fine print at the bottom. Yet it's vital for borrowers to fully understand how these fees can affect the true cost of their loan.
Application Fees
These are fees that are payable to the lender when you take out a loan. Application fees can range from $400 to more than $1,000, depending on the lender and type of loan.
This fee covers the banks costs of approving, documenting and settling your loan, which can include its administrative costs, legal's and valuation fees.
However, sometimes legal costs and valuation fees are not included in the application fee so make sure you know exactly what's covered by your loan's application fee, and what isn't.
Your Mortgage Broker may ask you to supply a cheque for the application fee (made payable to the lending institution) before the loan is submitted, as the broker will need to include the cheque with the completed loan application with some lenders. With other lenders this won't be necessary.
Some lenders will reduce their application fees if, for example, the borrower takes out a credit card, opens a bank account or otherwise gives further business to the lender. Temporarily (or conditionally) reduced and waived application fees are often used as a marketing tool in ad campaigns.
The application fee is usually refundable if your loan is declined, less any costs the bank has incurred in assessing your application. If this is not the case then look to your alternatives.
Legal Fees
This fee covers the legal costs of preparing your loan document. With larger banks and lenders with in-house legal departments, the legal costs are often included in the application fee. However, smaller lenders who outsource or subcontract legal work may charge borrowers for the legal work required on their loan application.
Valuation Fees
In order to satisfy itself that your property is of sufficient value to secure a loan of the amount you're seeking, the bank will typically have the property valued by a professional valuer.
The fee for this service may be included in the application fee, or it may be payable in addition to the application fee. Note, also, that this fee is typically charged for each property being used as security. If multiple properties are securing a loan, a separate valuation fee may be incurred for each one.
Not all lenders will require the secured property to be valued. Some will accept the contract price as the valuation.
Lender's Mortgage Insurance
Lender's Mortgage Insurance (or LMI) protects the lender against loss of capital if you default on your loan and the secured property sells for less than the outstanding loan balance (plus costs). If this happens, the lender will claim the loss from the LMI insurance company, which will in turn take legal action to recover this shortfall from you (the original borrower.)
LMI insurance protects only the lender's interest and not the borrowers. However, the borrower pays the premium.
Clearly the risk of a secured property selling for less than the outstanding loan balance increases with higher loan-to-value ratios (LVR). So the cost of LMI is related to the LVR of the loan. The higher an LVR, the higher the LMI premium as a percent of the loan amount.
If the LVR is less than 80% (e.g. a loan of less than $80,000 on a property valued at $100,000), lender's mortgage insurance is usually not required.
The need for LMI is determined by the property's value (as determined by the banks valuer), and not its selling price. This is often a good argument for property buyers to include a 'subject to finance' or 'subject to valuation' clause in their contracts to allow them to exit the contract if the property's value comes in much lower than purchase price.
Government Fees
Government fees can include:
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Registration Fees
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Stamp Duty on the amount of the loan
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Stamp Duty on the purchase price of the property
The amount of these fees vary from state to state. Your banker or mortgage broker will be able to advise you on the charges that will be applicable in your particular situation.
Most states also have certain concessions on stamp duty available to first homebuyers, which can result in saving thousands of dollars.
Ongoing fees and charges
Many loans incorporate periodic (usually monthly) fees for the life of the loan. If a loan offers 'no monthly fees' but carries a slightly higher interest rate, it may not be immediately clear if the loan is actually better than a similar loan with a monthly fee but a lower interest rate or more features.
The ongoing costs you incur on your loan can also be affected by how you manage it, and prudent borrowers will ensure that they've chosen a loan with a fee structure to best suit their own circumstances.
For example the ability to redraw funds from the home loan (where extra repayments have been made) is a popular option with many people. One bank might charge borrowers $50 per year for the redraw facility, but let them redraw as often as they wish with no additional costs. Another bank might not charge the $50 annual fee, but might charge $10 per redraw. Others will charge nothing at all.
To accurately determine the best loan at the time of application, borrowers must have some idea of how they plan to manage the loan in the future.
Some of these costs must be paid upfront by the borrower while others can be added to the loan amount. But all fees will impact on the real cost of the loan, and less informed borrowers may get quite a shock when they become aware of the total amount of the 'extra' costs they hadn't budgeted for. Understanding the fees and charges is the first step towards choosing the best home loan.