Buying a home is expensive, so it makes sense to reduce home loan fees and charges where you can. The less you pay in home loan fees, the better.
Many homebuyers are able to avoid paying some of these fees altogether as lenders often run special promotions with refinance and purchase rebates, no loan processing fees, free valuation etc. while some lenders offer special discounts to first home buyers and select professionals.
What are the different home loan fees and charges?
Broadly speaking, home loan fees can be categorised into four categories:
- Fees paid at settlement
- Fees that may apply during the term of your loan
- Fees for home loan features
- Fees if you repay the loan early, switch loans or refinance
1. Fees payable at settlement
The following are fees that are payable at settlement.
- Home loan application or loan processing fee: This is a once-off fee the bank may charge when you first take out a loan. This fee varies between lenders but generally ranges between $0 to $800.
- Valuation fee: Once you’ve found a property, the lender will want to have its own valuer perform a valuation on the property. Some lenders will waive the valuation fee, but they are far and in between. It can cost up to $300. We can order a free upfront valuation for you with some of our lenders.
- Settlement or establishment fee: Settlement fee is a fee payable to the bank to cover the cost the bank incurs in establishing your loan. The fee ranges between $0 to $600 depending on the lender. If you opt for a professional package, the settlement fee is usually waived.
- Rate lock fee for fixed loan: Lenders will charge you a rate lock fee if you wish to lock-in your rate prior to the settlement date. It allows you to lock in the interest rates for a period of 90 days. Some charge a fees in the range of $250 to $900 while others may charge up to 0.15% of the loan amount.
It’s worth pointing out that, generally speaking, non-conforming or specialist lenders tend to charge higher fees compared to major lenders.
Lenders Mortgage Insurance
Lenders Mortgage Insurance (LMI) fee is a fee that is applicable when you borrow over 80% of the property value. This is usually the biggest ticket item cost when taking out a home loan.
The LMI fee becomes more expensive, the greater your loan to value ratio (LVR) is. For example, someone borrowing just 85% of the property value may get the LMI fee waived or pay a few thousand dollars, but someone borrowing 95% of the property value is looking at an LMI fee of tens of thousands of dollars. You can get the LMI fee waived with a guarantor home loan.
2. Fees that may apply during the term of your loan
There are a few fees that may apply during the term of your loan:
- Ongoing fees: There may be ongoing fees such as annual fees, monthly account-keeping fees. It could be a $15 monthly fee or an annual $395 fee. While it may not seem like much at first, considering you’ll have to pay $395 every year, it adds up to $11,850 over a 30-year loan term. This money may be better saved up in your account.
- Late payment fees: Late payment fees are fees charged when you miss your repayment due date by five business days. The fees are continually charged until you repay all arrears or enter into a repayment plan with your bank. The late payment fees can be anywhere between $20 to $50 per month.
3. Fees for home loan features
Home loans these days are very customisable, you can pick and choose the features you want. However, they come with fees, so you should consider whether or not they’re worth the fees.
Some common home loan features and their costs are:
- Extra repayments: Extra repayments are usually free. With this feature, you have the ability to make extra repayments into your loan on top of the minimum loan repayment. Paying even a little bit extra each time means you pay off the loan much earlier and reduce the interest charged over the life of the loan. E.g. If you have a $400,000 loan at an interest rate of 3% (30 year), and you make extra repayments of $200 monthly into your loan, you’ll pay off the loan four years and nine months earlier, and save around $36,000 in interest.
- Redraw fees: A redraw facility allows you to access any additional repayments you’ve made on your loan. Some loans have a set number of free redraws; exceeding which will incur you redraw fees. Some lenders may charge you up to $50 per redraw, whereas some lenders don’t charge anything at all.
- Offset account fees: An offset account is a transaction account linked to your home loan. You can make deposits or withdraw from it as you would with a regular transaction account. They are a great way to minimise the interest you pay. Offset accounts typically come bundled with packaged home loans. Alternatively, you can opt to get an offset account for a monthly fee typically around $15. Just ensure that you have enough money in your offset account to cover the cost of an offset account. Otherwise, you may not receive much of the benefit of having an offset account.
- Loan portability: Loan portability allows you to transfer your existing mortgage, including the current balance, interest rate, offset account and all other features of the home loan, to a new property. It’s good for people that have a fixed interest rate and want to avoid break costs. Most lenders will charge around $200 or so to transfer the mortgage no matter the amount of the loan.
4. Fees if you repay the loan early, switch loans, or refinance
There are a few home loan fees that the banks may charge you when you repay the loan early, switch loans or refinance to another lender. They are:
- Switching fees: Lenders may charge you a switching fee when you switch your loan product with the same bank, e.g. you switch your loan from a variable rate to a fixed rate with the same bank (internal refinance). This fee can range from $250 to $500.
- Break costs: Break costs are fees charged by lenders on fixed-rate home loans when you exceed the extra repayment limit or when you refinance within the fixed term. Break costs or home loan exit fees can be costly, so carefully consider whether or not it’s worth paying this fee. You can use our break fee calculator to estimate your home loan exit fees.
- Mortgage discharge fees: Most lenders will need you to complete a discharge authority form when you end the loan contract early, either by refinancing or selling your property. Lenders typically charge a fee of around $350 to $500 to process a discharge request.
How can I reduce home loan fees and charges?
Here are some of our top tips to reduce home loan fees and charges:
- Look for a lender that’ll approve you for a home loan and who is also running special promotions and/or is offering purchase rebates or refinance rebates.
- Order a free upfront valuation (available through a mortgage broker).
- Understand the fees before you commit to a loan. For example, if you’re considering fixing your home loan, know that if you break your fixed loan contract, it can cost you thousands of dollars.
- Don’t pay for packaged loans if you’re never going to use most of the features.
Should you go for a packaged loan to reduce fees?
To reduce unnecessary home loan fees, you can either opt-in for a packaged loan or for a no-fee basic home loan.
A packaged loan is one where you pay an annual fee in return for discounted interest rates, waived application and valuation fees and discount on services such as home and contents insurance. They also come fully equipped with home loan features such as offset account, redraw facilities, and loan portability.
In most cases, a professional package is suitable for loans that are more than $250,000. Overall, they’re a great way to bundle several products together and save. They cost around $180 to $395 per annum.
Alternatively, basic home loans, also known as no-frills home loans, are a type of loan that trades off flexibility and features in return for low or no ongoing fees and reduced or waived application fees.
If you are after a simple loan that is easy to use and doesn’t cost anything, then a basic home loan would be well suited for you.
How can mortgage brokers help?
As mortgage brokers, when assessing home loans, we prioritise the cost of a product such as interest rate, fees and charges and repayment size.
We also consider any non-cost considerations such as a quicker settlement, specific loan features, and whether or not they provide you with good value relative to other options.
With 50 plus lenders on our panel, we can usually find you a loan that best meets your objective and requirements.
Speak with one of our award-winning specialist mortgage brokers by giving us a call on 1300 889 743 or by filling in our online assessment form.