Hidden fee traps and how you can avoid them

Hidden fee traps and how you can avoid them

One of the most common ways we lose money is through paying avoidable fees.

In June 2017, the Reserve Bank of Australia (RBA) released data that showed Aussies are paying $4.41 billion a year in banking fees, with many of the highest charges relating to home loans and credit cards.

So how can we avoid getting stung by unnecessary fees?

RateCity spoke to Sydney mother of two, Natalie, about how she found herself falling into her bank's fee traps, and how she’s choosing to break the cycle.

It all adds up

RateCity research found that the fees collected from credit cards in the 12 months leading to June 2017 totalled $1.56 billion – an increase of $48 million from 2015. Home loan fees also hit $1.24 billion, an increase of $5 million from the year before.

Whether it’s through ATM fees or choosing credit cards with annual fees, we’re all guilty of paying them and we’re not always aware they exist.

Natalie certainly wasn’t when we spoke to her.

“I was quite surprised as I always thought I was rather thorough when looking at those things,” she said. 

“I guess I didn’t look at all of the fine print. I found out about a few fees didn’t even know existed!”

Natalie found that on her credit card she was currently paying an annual fee and rewards package fee.

She was also at risk of paying the following fees on her transaction account:

  • Monthly fees;
  • Dishonor fees;
  • Periodical-payment-not-made fees;
  • Account overdrawn fees;
  • Overseas ATM cash withdrawal fees; and
  • Foreign transaction fees for online shopping.

When Natalie first took out her home loan she paid a progress draw set up fee and fixed rate lock in fee (0.10 per cent of her loan amount). She also makes ongoing payments due to a package fee on her mortgage.

“I wasn’t really made aware of these fees when I joined,” said Natalie

“They talk to you about the main fees, like withdraw fees and ATM fees, but when it comes to something like a fee to access my credit card rewards program, I was definitely not aware.

“And it adds up to hundreds of dollars,” said Natalie.

How can everyday Aussies like Natalie break the fee cycle? 

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Natalie’s story is not unique, especially when banks are making $4.41 billion dollars a year off banking fees.

Some fees may be unavoidable, however, there are a few ways that you can beat the banks and reduce your overall payments.

  1. Credit card annual fees

There is really no reason to be paying an annual fee on your credit card as there are over 30 on the market that don’t charge you. Also, keep an eye on rewards cards as they often attract the biggest fees.

Average fee: $130

Highest fee: $1,200

  1. Ongoing home loan fees

The process of taking out a home loan can be extremely taxing and often confusing. Unfortuantely, home loans are full of hidden fees so before you sign on the dotted line make sure you ask your lender for a complete run down on all the fees you’ll be expected to pay over the life of the loan. This way you avoid nasty surprises and budget accordingly. There are almost 1980 home loan products that don’t have an annual fee, so it pays to compare.

Average annual fee: $339

Highest annual fee: $849

Home loans without annual fees:

 

 

  1. Transaction account fees

Sometimes lenders will charge a monthly account fee that is small enough that you may not notice you’re paying it. There are plenty of zero fee options available so find out if you’re paying more than you should – consider switching.

Average fee: $55 a year

Highest fee: $420 a year

  1. Superannuation fees 

All super funds incur some sort of fee but the amount you pay can vary wildly from just over $300 a year up to over $1,100 a year, based on a $50,000 investment. While fees should not be the deciding factor when choosing a fund, if they are excessive they can eat into any returns you may be earning. Look at the funds medium to long term performance in addition to the fees to see if you are getting value for money.

Average fee: $631

Highest fee: $1,100

  1. ATM fees 

It goes without saying that you should stop using ATMs outside of your bank’s network. If possible, make ongoing goals of avoiding them for a month, six months and then a year. Plan cash withdrawals ahead for the week, or even withdraw cash at your local Woolworths when you do a grocery trip. By saving $2 a week on ATM transactions throughout the year you could be $104 richer.

ATM savings: $104 a year.

  1. Car loan fees

Car loan application fees can be exorbitant. On average, they are just under $100 but can be as high as $410, so doing a bit of research can save you a lot of money. Further, once you have your new car at home in the garage, try to avoid any account keeping fees, which on average will set you back $7 a month.

Average car loan application fee: $197

Highest car loan application fee: $410

Car loans without application fees:

 

 

  1. Overdrawn fees

This type of fee occurs when you accidentally withdraw more money than you have in your account. This is often caused by scheduled direct debits so set a reminder at least two days beforehand to ensure you have enough money in your account.

Average fee: $11

Highest fee: $40 (every time you go over)

  1. Balance transfer handling fees 

If you have outstanding debt on your credit card a 0 per cent interest rate balance transfer credit card is an enticing way to buy yourself some time. However, it’s important to remember that one way lenders make money through these cards is with a handling fee that will be a percentage of the amount transferred. There are 148 cards on the market that don’t sting you with this additional fee.

Average cost (on a $10K balance transfer): $165

Highest cost (on a $10K balance transfer): $300

  1. Overseas card fees

It’s easy to get swept up in the fun of a holiday and forget that your credit card is racking up currency conversion fees. There are currently eight cards on the market that don’t charge this, so do your research before you leave and you’ll have spare cash to splash.

Average: $29

Highest $36 (per trip, based on a $1,000 spend on your credit card and use of the ATM four times).

Small changes add up to a world of difference for your savings

We asked Natalie what she thought now knowing about these hidden fees.

“I’m definitely looking at my home loan and credit card differently,” said Natalie.

“My family moves around a lot and we’re not a loyal type of banker. We normally just look for recommendations from friends or news stories around interest rates.

“We always picked our credit card based on the best interest rates – same with mortgages.

“This has made me want to shop around and look at other lenders with less fees, instead of looking at who has the best interest rate,” said Natalie.

Hidden Fee Traps

 

ITEM Average Fees Highest Fees
Credit card annual fee $130.53 $1,200
Ongoing home loan fee $339.33 $849
Home loan discharge fee $295 $1,400
Home loan application fee $518 $995
Transaction account admin fee $55 $40
Transaction overdrawn fee (assuming 1x per year) $11.17 $40
Superannuation fees (on $50K) $631 $1,100
ATM fees (based on one withdrawal a week from an alternative ATM) $104 $104
Balance transfer credit card fee ($10K transfer) $165 $300
Overseas ATM fees (based on 4 ATM withdrawals per trip and one trip per year) $13 $10
Overseas currency conversion fees (based on a credit card spend on $1K, and one trip per year) $29.60 $36.50
Car loan application fee $197.89 $410
Car loan monthly fees $84 $600
     
TOTAL ANNUAL FEES (excluding one off application fees) $1,563 $4670

(The above table was calculated using the average and maximum savings possible. This will vary from person to person based on their individual circumstances.)

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Learn more about home loans

What is an ongoing fee?

Ongoing fees are any regular payments charged by your lender in addition to the interest they apply including annual fees, monthly account keeping fees and offset fees. The average annual fee is close to $200 however there are almost 2,000 home loan products that don’t charge an annual fee at all. There’s plenty of extra costs when you’re buying a home, such as conveyancing, stamp duty, moving costs, so the more fees you can avoid on your home loan, the better. While $200 might not seem like much in the grand scheme of things, it adds up to $6,000 over the life of a 30 year loan – money which would be much better off either reinvested into your home loan or in your back pocket for the next rainy day.

Example: Anna is tossing up between two different mortgage products. Both have the same variable interest rate, but one has a monthly account keeping fee of $20. By picking the loan with no fees, and investing an extra $20 a month into her loan, Josie will end up shaving 6 months off her 30 year loan and saving over $9,000* in interest repayments.

What fees are there when buying a house?

Buying a home comes with ‘hidden fees’ that should be factored in when considering how much the total cost of your new home will be. These can include stamp duty, title registration costs, building inspection fees, loan establishment fee, lenders mortgage insurance (LMI), legal fees and bank valuation costs.

Tip: you can calculate your stamp duty costs as well as LMI in Rate City mortgage repayments calculator

Some of these fees can be taken out of the mix, such as LMI, if you have a big enough deposit or by asking your lender to waive establishment fees for your loan. Even so, fees can run into the thousands of dollars on top of the purchase price.

Keep this in mind when deciding if you are ready to make the move in to the property market.

What are exit and discharge fees?

The Federal Government banned exit fees in 2011, removing one of the biggest barriers to taking switching home loan providers. Lenders can still legally charge a discharge fee, which is payable when you come to the end of your home loan, however these fees are relatively small at an average of $304 while 134 products don’t have them at all.

What is upfront fee?

An ‘upfront’ or ‘application’ fee is a one-off expense you are charged by your bank when you take out a loan. The average start-up fee is around $600 however there are over 1,000 loans on the market with none at all. If the loan you want does include an application fee, try and negotiate to have it waived. You’ll be surprised what your bank agrees to when they want your business.

What's wrong with traditional ratings systems?

They’re impersonal 

Most comparison sites give you information about rates, fees and features, but expect you’ll pay more with a low advertised rate and $400 ongoing fee or a slightly higher rate and no ongoing fee. The answer is different for each borrower and depends on a number of variables, in particular how big your loan is. Comparisons are either done based on just today or projected over a full 25 or 30 year loan. That’s not how people borrow these days. While you may take a 30 year loan, most borrowers will either upgrade their house or switch their home loan within the first five years. 

You’re also expected to know exactly which features you want. This is fine for the experienced borrower, but most people know some flexibility is a good thing, but don’t know exactly which features offer more flexibility than others. 

What is the flexibility score?

Today’s home loans often try to lure borrowers with a range of flexible features, including offset accounts, redraw facilities, repayment frequency options, repayment holidays, split loan options and portability. Real Time Ratings™ weights each of these features based on popularity and gives loans a ‘flexibility score’ based on how much they cater to borrowers’ needs over time. The aim is to give a higher score to loans which give borrowers more features and options.

They’re not always timely

In today’s competitive home loan market, lenders are releasing new offers almost daily. These offers are often some of the most attractive deals in the market, but won’t get rated by traditional ratings systems for up to a year. 

The assumptions are out of date 

The comparison rate is based on a loan size of $150,000 and a loan term of 25 years. However, the typical loan size is much higher than that. Million dollar loans are becoming increasingly common, especially if you live in metropolitan parts of Australia, like Sydney and Melbourne. It’s also uncommon for borrowers to hold a loan for 25 years. The typical shelf life for a home loan is a few years. 

The other problem is because it’s a percentage, the difference between 3.9 or 3.7 per cent on a $500,000 doesn’t sound like much, but equals around $683 a year. Real Time Ratings™ not only looks at the difference in the monthly repayments, but it will work out the actual cost difference once fees are taken into consideration. 

What is a redraw fee?

Redraw fees are charged by your lender when you want to take money you have already paid into your mortgage back out. Typically, banks will only allow you to take money out of your loan if you have a redraw facility attached to your loan, and the money you are taking out is part of any additional repayments you’ve made. The average redraw fee is around $19 however there are plenty of lenders who include a number of fee-free redraws a year. Tip: Negative-gearers beware – any money redrawn is often treated as new borrowing for tax purposes, so there may be limits on how you can use it if you want to maximise your tax deduction.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

Do mortgage brokers need a consumer credit license?

In Australia, mortgage brokers are defined by law as being credit service or assistance providers, meaning that they help borrowers connect with lenders. Mortgage brokers may not always need a consumer credit license however if they’re operating solo they will need an Australian Credit License (ACL). Further, they may also need to comply with requirements asking them to mention their license number in full.

Some mortgage brokers can be “credit representatives”, or franchisees of a mortgage aggregator. In this case, if the aggregator has a license, the mortgage broker need not have one. The reasoning for this is that the franchise agreement usually requires mortgage brokers to comply with the laws applicable to the aggregator. If you’re speaking to a mortgage broker, you can ask them if they receive commissions from lenders, which is a good indicator that they need to be licensed. Consider requesting their license details if they don’t give you the details beforehand. 

You should remember that such a license protects you if you’re given incorrect or misleading advice that results in a home loan application rejection or any financial loss. Brokers are regulated by the Australian Securities & Investment Commission (ASIC), as per the National Consumer Credit Protection (NCCP) Act. 

What are the responsibilities of a mortgage broker?

Mortgage brokers act as the go-between for borrowers looking for a home loan and the lenders offering the loan. They offer personalised advice to help borrowers choose the right home loan for their needs.

In Australia, mortgage brokers are required by law to carry an Australian Credit License (ACL) if they offer credit assistance services. Which is the legal term for guidance regarding the different kinds of credit offered by lenders, including home loan mortgages. They may not need this license if they are working for an aggregator, for instance, as a franchisee. In both these situations, they need to comply with the regulations laid down by the Australian Securities and Investments Commission (ASIC).

These regulations, which are stipulated by Australian legislation, require mortgage brokers to comply with what are called “responsible lending” and “best interest” obligations. Responsible lending obligations mean brokers have to suggest “suitable” home loans. This means loans that you can easily qualify for,  actually meet your needs, and don’t prove unnecessarily challenging for you.

Starting 1 January 2021, mortgage brokers must comply with best interest obligations in addition to responsible lending obligations. These require mortgage brokers to act in the best interest of their customers and also requires them to prioritise their customers’ interests over their own. For instance, a mortgage broker may not recommend a lender who gives them a commission if that lender’s home loan offer does not benefit that particular customer.

How to break up with your mortgage broker

If you find a mortgage broker giving you generic advice or trying to sell you a competitive offer from an unsuitable lender, you might be better off  breaking up with the mortgage broker and consulting someone else. Breaking up with a mortgage broker can be done over the phone, or via email. You can also raise a complaint, either with the broker’s aggregator or with the Australian Financial Complaints Authority as necessary.

As licensed industry professionals, mortgage brokers have the responsibility of giving you accurate advice so that you know what to expect when you apply for a home loan. You may have approached the mortgage broker, for instance, because you have questions about the terms of a home loan a lender offered you. 

You should remember that mortgage brokers are obliged by law to act in your best interests and as part of complying with The Australian Securities and Investments Commission’s (ASIC) regulations. If you feel you didn’t get the right advice from the mortgage broker, or that you lost money as a result of accepting the broker’s suggestions regarding a lender or home loan offer, you can file a complaint with the ASIC and seek compensation. 

When you first speak to a mortgage broker, consider asking them about their Lender Panel, which is the list of lenders they usually recommend and who may pay them a commission. This information can help you decide if the advice they give you has anything to do with the remuneration they may receive from one or more lenders.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor. 

How personalised is my rating?

Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time. 

Do other comparison sites offer the same service?

Real Time RatingsTM is the only online system that ranks the home loan market based on your personal borrowing preferences. Until now, home loans have been rated based on outdated data. Our system is unique because it reacts to changes as soon as we update our database.