The real costs of a home loan

The real costs of a home loan

Disguised by a league of various names including application, start-up, set-up or up-front fees, whatever you call it, an application fee will always be applied when signing up for a new home. But along with this, what are the other costs, the real costs, of a home loan?

What is an establishment fee? 

An establishment fee is meant to cover the costs of creating your file and producing the necessary documents to set up your home loan.

The amount you pay to establish a mortgage differs between institutions. Some may charge hundreds of dollars or more, others will shoulder the fee on your behalf and not charge you an establishment fees at all. So it’s worth taking this into consideration when calculating the costs of setting up a home loan or switching to another lender.

What other costs will I incur from my home loan?

Unfortunately, lenders charge borrowers with more than just establishment fees over the life of the mortgage.

Some of these extra fees can include:

  • Monthly ongoing fees
  • Early exit fees
  • Break fees
  • Deferred establishment fees
  • Default fees if you fail to meet repayments

If you borrow through a broker you may be hit with a brokerage fee, valuation fee, legal fees and settlement fees on top of this, which can easily run into the thousands of dollars, so it’s likely to be cheaper if you compare home loans, and then apply online.

To get a better idea of the real cost of your mortgage including fees and charges it’s best to look at the comparison rate, as opposed to the advertised rate. A comparison rate helps you identify the actual cost of a loan and it takes into account set-up costs, as well as any other up-front or ongoing costs of holding a loan. These fees can really add up over time and should be a deciding factor when comparing all financial products.

For instance, take two home loans with the same advertised rate of 6.82 percent. Both have an ongoing monthly fee of $10, but one has a $445 establishment fee, while the other has none. As a result, the comparison rates differ by 0.02 percent.

So before you sign up for a home loan or refinance with a new lender, it’s important to consider establishment fees as well as a number of other costs associated with applying for finance. Also read the product disclosure statement and understand all conditions before signing up, so you know exactly what to expect financially and legally from your mortgage.

Conduct your own fees and charges research with the RateCity home loan comparison chart and home loan repayment calculator.

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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.

Mortgage Calculator, Repayment Type

Will you pay off the amount you borrowed + interest or just the interest for a period?

Mortgage Calculator, Loan Amount

How much you intend to borrow. 

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

What is the average annual percentage rate?

Also known as the comparison rate, or sometimes the ‘true rate’ of a loan, the average annual percentage rate (AAPR) is used to indicate the overall cost of a loan after considering all the fees, charges and other factors, such as introductory offers and honeymoon rates.

The AAPR is calculated based on a standardised loan amount and loan term, and doesn’t include any extra non-standard charges.

How can I get a home loan with no deposit?

Following the Global Financial Crisis, no-deposit loans, as they once used to be known, have largely been removed from the market. Now, if you wish to enter the market with no deposit, you will require a property of your own to secure a loan against or the assistance of a guarantor.

Mortgage Calculator, Loan Results

These are the loans that may be suitable, based on your pre-selected criteria. 

Mortgage Calculator, Loan Term

How long you wish to take to pay off your loan. 

What does going guarantor' mean?

Going guarantor means a person offers up the equity in their home as security for your loan. This is a serious commitment which can have major repercussions if the person is not able to make their repayments and defaults on their loan. In this scenario, the bank will legally be able to the guarantor until the debt is settled.

Not everyone can be a guarantor. Lenders will generally only allow immediate family members to act as a guarantor but this can sometimes be stretched to include extended family depending on the circumstances.

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.

Does each product always have the same rating?

No, the rating you see depends on a number of factors and can change as you tell us more about your loan profile and preferences. The reasons you may see a different rating:

  • Lenders have made changes. Our ratings show the relative competitiveness of all the products listed at a given time. As the listing change, so do the ratings.
  • You have updated you profile. If you increase your loan amount, the impact of different rates and fees will change which loans are the lowest cost for you.
  • You adjust your preferences. The more you search for flexible loan features, the more importance we assign to the Flexibility Score. You can also adjust your Flexibility Weighting yourself, which will recalculate the ratings with preference given to more flexible loans.