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Will lenders recoup lost exit fees by hiking up other mortgage costs?

Will lenders recoup lost exit fees by hiking up other mortgage costs?

December 9, 2010

Mortgage lenders charging excessive early exit fees have been advised to change their ways thanks to new guidance set by the Australian Securities and Investment Commission (ASIC). But will other costs for mortgages increase as a consequence?

On November 10, 2010, ASIC released a list of expectations in a bid to reduce excessive fees. Some new rules that lenders must follow, include:

  • lenders must be able to explain in dollars the amount charged or the method of calculation with meaningful examples the borrowers can understand;
  • they cannot increase early exit fees during the loan term;
  • a list of all costs and losses that are not to be included in exit fees should be provided; and
  • a list of costs and losses that will be included in an exit fee should be supplied.

But while this is good news for borrowers, does this mean that monthly service fees, interest rates or other home loan fees will increase to compensate lenders for their loss?

Will other fees increase?
RateCity’s CEO, Damian Smith, says it could be a possibility. “ASIC has taken a great step towards fairer lending practices by Australia’s financial institutions and we applaud them for their continuous work towards better banking,” Smith says. “However our research shows that lenders could easily recoup the loss of revenue from early exit fees by increasing ongoing fees.”

RateCity calculated that collectively the major four banks (Commonwealth Bank, ANZ, Westpac and NAB) earned around $79 million per year in early exit fees from borrowers switching home loans during the first two years.

If the major four banks wanted to recoup the $79 million they earn in early exit fees, they could charge every mortgage customer an additional $3.80 per month (based on approximately 1.72 million home loan customers).

What to be aware of
Borrowers considering the switch or opening new loans should be aware that the fees and charges could potentially increase. Check the establishment fees and upfront costs, and if you switch early you may have to pay the remaining fee when you break the loan contract, which could be thousands of dollars.

Some financial institutions are offering deals in response to the crackdown. For instance ING Direct will offer up to $1000 cash to any customer who switches their mortgage over from one of the major four banks as well as opens up an Orange Everyday transaction account before June next year.

Before you switch, compare home loan rates online and find one offering lower fees. Be sure to read the product disclosure statement (PDS) so you are aware of all fees and charges involved in switching.

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Learn more about home loans

How does ANZ calculate early repayment costs?

If you have a fixed interest home loan, you’ll pay ANZ home loan early exit fees for partial or full repayment of the loan amount before the end of the fixed interest rate duration. These fees are also payable if you switch to another variable or fixed-rate loan.

The ANZ mortgage early exit fees can vary and you can get an estimate from the lender before you decide to prepay the loan. However, the exact early repayment cost can be determined when you prepay the loan.

The early exit fees are calculated after considering factors like the prepayment amount, the period left before the fixed-rate duration ends, and the change in the market rates since the beginning of the fixed-rate period. The early exit fees may not be charged if you’re paying off a smaller amount. You can check with ANZ to see how much you’ll have to pay.

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 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.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay.