We pay through the nose to exit home loans
Australians pay a much higher fee to exit a loan than home owners in the UK and US, confirms a newly released review of home loans in this country.
The report by the Australian Investment and Securities Commission (ASIC) is the culmination of a high level review driven by treasurer Wayne Swan.
Conducted by Fujitsu Consulting & JPMorgan, the research goes on to reveal:
"Australian mortgage fees are clearly higher at all stages across the transaction lifecycle... Australian consumers are not always presented a clear picture when assessing mortgage products. There are a wide range of fee variations in the Australian market and consumers need to make a trade-off between interest rates and fees, with a lower headline rate having the potential to attract higher fees for application, valuation, legals and settlement."
A chart in the report shows that the average early termination fee in Australia is over $900, compared to termination fees in the UK of just over $200, and the US just under $300.
The report cites the complexity of Australian home loan options available, and the variations in the way they are described as being factors which make the choice a difficult one for consumers.
What sort of money are we talking about? ASIC’s review identified a variable rate loan product that charges a $5,685 early termination fee on a $250,000 variable rate loan (representing 2.27% of the total loan amount), and a basic rate loan product that charges a $7,580 early termination fee, also on a $250,000 loan representing 3.03% of the total loan amount).
So how much would you need to save in percentage terms in order to recover the cost of early termination? According to the report:
"... a $1,500 early termination fee could be recovered, over three years, by an interest rate saving of at least 20 basis points (in this case, a drop from 8.40% to 8.20%). A $3,000 early termination fee would require an interest rate saving, over three years, exceeding 35 basis points."
In summary, you need to weigh up your options carefully if you intend to refinance. Furthermore, when signing a mortgage contract be sure to investigate the early termination fees so you are fully aware of the potential cost, should you find yourself in a position where you need to pay out or refinance the loan.
Read the full report here:
ASIC Review of Mortgage Entry and Exit Fees
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