What type of home loan fees can you expect to pay?

There’s more to a home loan than the interest rate you may be offered. Homeowners may find that some home loan options are more expensive than others due to the fees charged.

In fact, some home loans may advertise a rock-bottom interest rate but end up costing you more over the life of the loan through fees if you’re not careful. So, it’s crucial you understand the types of fees you may be charged and when, and how to compare your options.

What home loan fees are there?

There are three main types of home loan fees: upfront fees, ongoing fees and exit fees. The amount and number of fees you could be charged will depend on the lender you choose for your home loan, and the loan itself.

• Upfront fees

An upfront home loan fee is one that you will typically pay during the approval or settlement process, before you commence your home loan. These can include:

• Application fees
• Valuation fees
• Mortgage registration fees
• Conveyancing fees
• Legal fees

You may also be required to pay other upfront costs, such as stamp duty and lender’s mortgage insurance (LMI).

Depending on the value of your property and whether you are a first home buyer, you may qualify for stamp duty exemption or concession. This is state and territory dependent, so check your government Revenue website for more information.

If your home loan deposit is below 20% you may be charged LMI, which can climb into the tens of thousands of dollars range, depending on your property value. This is because home loan lenders consider a borrower with a loan-to-value ratio (LVR) of greater than 80% (aka having a deposit under 20%) risky and more likely to default on the loan. This is also true for homeowners considering refinancing before they’ve reduced their LVR to 80% or below.

• Ongoing fees

A home loan lender may charge you several fees throughout the 20-30 years of your mortgage. This can include:

• Monthly fees (account service fees)
• Annual fees
• Late payment fees
• Extra repayment fees
• Redraw fees
• Portability fees

Not every home loan will come with these fees, so if keeping costs low is a priority to you it may be worth comparing home loans with low fees. Annual fees in particular can begin to add up over 20-30 years, and there are a range of options that do not charge this fee.

However, annual fees are considered commonplace for home loans offering flexibility and features, such as an offset account or a home loan package. These ongoing fees may help to cover the cost of the loan’s features. If you don’t want a basic, no-frills home loan, you may need to compare options that do charge ongoing fees.

Speaking of features, not every lender allows you to make extra repayments or access your redraw facility at will. You may need to compare options that offer these without penalty or with 100% access if you are prioritising those features in your comparison.

• Exit fees

While home loan exit fees have been outlawed since 1 July 2011, you may find that when switching home loans or paying your mortgage off, you are charged a:

• Fixed-rate break fee
• Discharge fee

A fixed-rate break fee can be charged if you exit your fixed rate period early. If a homeowner was 2 years into a 5-year fixed rate period and decided to refinance, as they are breaking this fixed period, the lender may charge a fee.

Further, lenders may also charge you a small fee when you finish paying off your home loan or when you refinance to another lender, called a discharge fee, as well as a termination fee or a settlement fee. It helps to cover the legal and administrative costs charged to your lender when they close your home loan.

How to compare home loan fees

There are two ways to easily compare the fees charged on a home loan; through looking at each fee listed, calculating the costs and comparing these to other options, or by looking at the comparison rate.

A comparison rate can be a helpful benchmark that illustrates the “true cost” of a home loan. It takes into consideration not just the interest rate charged but many of the fees to create a more realistic rate for your comparison.

Comparison rates are slightly outdated now as it was originally based on a $150,000, 25-year home loan, but the average mortgage around Australia generally sits around $600,000. But it is a helpful indicator of whether a lender charges a lot of fees.

For example, home loan A advertises an interest rate of 3.50% with a comparison rate of 5.30% and home loan B advertises an interest rate of 4.10% with a comparison rate of 4.25%.

You could assume that home loan A may be more affordable as the advertised rate is lower than home loan B, but with such a higher comparison rate, it’s safe to assume there are a few fees involved that will bump up your total costs. In this example, home loan B may be more affordable in the long run.

Consider instead comparing the fees and charges of both loans A and B closely to more accurately calculate which option could cost you more over the life of the loan.

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