Buying a property is the biggest investment most of us will ever make. Yet, when it comes to home loans, most buyers focus solely on the cost of repayments. Many fail to take into account the (potentially extensive) fees and costs that accompany different types of loans from different lenders.
In fact, this is an area that - with some careful evaluation - can save you considerable money over the course of a loan.
When it comes to choosing a mortgage, here are some of the different fees and costs to consider:
With a standard variable rate mortgage, lenders may charge an application fee for you to apply for your loan in the first place.
Big banks and well-known lenders have an application fee that covers valuation fees and document preparation charges. However, when you get down to small lenders – especially those specialising in non-conforming loans – you often see three or four separate charges that could tally to between $700 and $900. Most lenders will waive or reduce the fee, so don’t be afraid to ask.
If you have any less than a 20% deposit to put towards your mortgage, you will be required to take out mortgage insurance (your broker or lender can organise it for you). This insurance actually protects the lender in the event of a loan default and is valid for the full-term of your loan. For you, it is a one-off cost, but it can be quite significant, so it’s very important to factor it into your overall budget when it comes to making a purchase.
Lenders may require a valuation to protect their financial investment in your property, and ensure you’re not paying over market rate. This will usually cost you around a few hundred dollars - potentially more if it’s a more valuable property or in a remote location.
There are plenty of detailed legal documents associated with a property purchase - including the examination and execution of a very lengthy and complex sale contract. It is recommended that you seek legal advice before signing these documents, and it’s important to be aware that legal fees can vary considerably. Generally speaking, solicitors will charge more than property conveyancers.
Refinancing fees (discharge costs)
Some lenders may attempt to charge a fee if you want to re-finance your loan. When deciding whether or not to re-finance, it is important to take this fee into account and determine whether or not it is worth it.
Fixed rate break cost fees
While early repayment penalties have been banned for any home loan contracts entered into after 1 July 2011, many lenders do charge a fixed rate break cost fee - which is where you will incur a charge if you pay off your fixed rate loan before the end of a fixed rate period.
The actual calculation of the fixed rate break cost is complex, and impossible to determine ahead of time as it is based on the fixed rate you entered into, the prevailing fixed rates at the time you wish to repay the loan, and how much time is remaining before the expiry of your fixed rate term. Before deciding to pay off your loan, it is important to be aware that these break costs can equate to thousands, even tens of thousands of dollars.
One strategy for taking some of the fees and costs out of your mortgage is to consider an overall financial ‘package’.
This is where the lender will incentivise you to use their other financial products (usually at least one credit card and one transaction account) by charging a flat annual fee for your mortgage, credit card and transaction account.
Package fees are typically charged annually and can be anything up to $400. Before you consider this option, you need to be sure you have a need for everything (or at least the majority of what is included in the package) and also consider what the overall costs would be if you were to secure these products separately. Typically, when you add up monthly charges, ATM fees, credit card annual fees and mortgage fees, these packages generally save you money. However, you should resist being persuaded into any package where you have no use for the other products.
Want to learn more?
When it comes to fees and charges, getting the right information can make a big difference.
A Yellow Brick Road adviser can help you understand your options, and help you pursue a path that best suits your needs.