Interest may be the key expense of a mortgage but it pays to be mindful of ongoing fees that can significantly boost the overall cost of a loan. Nicola Field reports.
October 16, 2009
A review of more than 2,000 Australian home loans by RateCity has revealed that almost a third (29 percent) of loans come with ongoing fees, ranging from $3 per month to a hefty $35 each month.
It’s certainly an expense to be aware of. On a $300,000 mortgage charging 5.25 percent p.a., the average monthly fee of $9 adds an extra $2,700 to the total loan cost – the equivalent of paying an additional 0.036 percent in interest charges.
At the top end of the scale, packaged loans can charge monthly fees as high as $35. While this incorporates fees on a credit card and/or a transaction account included in the package, the higher cost underlines the importance of doing the sums to see if separate financial products offer better value.
Comparison rate – a useful benchmark
The obvious way to avoid monthly fees is by opting for a home loan that doesn’t charge the extra cost. But that doesn’t necessarily mean you will get a better deal. Lenders may compensate for a lack of fees with a higher rate. This makes the ‘comparison rate’ an essential tool for comparing between loans.
Also known as the ‘true’ rate or ‘AAPR’ (average annual percentage rate), the comparison rate incorporates the advertised, or headline, interest rate plus ongoing and upfront fees (application, legal, settlement and valuation). It provides a single figure to help borrowers cut through the confusion of different rates and fees, and by law the comparison rate must be displayed alongside the headline interest rate.
Do note, the comparison rate you’ll see advertised is typically calculated on a specific loan principal – often either $250,000 or $150,000. It’s a figure that will vary according to the loan principal.
Not all fees are included in the comparison rate
Despite the pluses, the comparison rate doesn’t paint a complete picture of the total cost of a loan. Penalty fees for late payments are not included. Nor are fees associated with certain loan features such as a redraw facility that lets you withdraw additional loan payments.
Conversely, the comparison rate doesn’t take into account factors that may make a loan attractive such as discounts on other products provided by your home loan lender.
The bottom line is that the comparison rate goes a long way towards revealing the true cost of a loan but your style of banking plus the loan features you use will ultimately determine the final bill.