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Home loan fees can pack a surprisingly big punch

Home loan fees can pack a surprisingly big punch

It’s impossible to think of home loans without thinking of interest rates. But there’s another surprisingly significant cost we ignore at our peril – fees.

When you take out a mortgage, your lender may charge you an upfront fee, consisting of some combination of an:

  • Application fee
  • Settlement fee
  • Valuation fee

Upfront fees aren’t cheap – they average $551, according to an analysis of all the home loans on the RateCity database at the end of April.

But upfront fees often pale in comparison to ongoing fees, which are generally charged either monthly or annually.

On average, ongoing fees cost $251 per year. Over the course of a 30-year loan term, that works out to be $7,530.

What are the different types of home loan fee?

  • Application fee
  • Settlement fee
  • Valuation fee
  • Legal fee
  • Monthly / annual fee
  • Offset / redraw fee
  • Early exit fee
  • Late payment fee
  • Discharge fee

So, what’s the total cost of a home loan?

The good news is, not all loans have upfront and ongoing fees.

Some don’t charge upfront fees; some don’t charge ongoing fees; some don’t charge either type of fee.

Of course, when it comes to comparing home loans, fees aren’t the only cost to consider. You also have to look at interest rates.

But trying to figure out the total cost of a home loan is complicated.

What would cost you more over the course of a 30-year loan – a mortgage with lower fees and a higher interest rate or a mortgage with higher fees and a lower interest rate?

How to compare home loans

Here are some of the things you should consider when comparing home loans:

  • Upfront fees
  • Ongoing fees
  • Advertised rate
  • Comparison rate
  • Interest rate type (principal and interest or interest-only)
  • Loan term
  • Loan features (e.g. offset account, extra repayments, loan portability)

How to find out the ‘real’ cost of your home loan

Thankfully, the mortgage industry has a way around this problem. It’s called the ‘comparison rate’.

The comparison rate is often regarded as a home loan’s ‘real’ interest rate, because it combines the advertised interest rate with most of the fees.

As such, a comparison rate will probably give you a more accurate picture of how much a 30-year mortgage will cost over the life of a loan than the advertised rate.

So when you research home loan options, and you compare fees and interest rates, don’t forget to look at the comparison rate.

How is the comparison rate calculated?

The comparison rate is calculated using an industry-wide formula. It includes things like revert rates after an introductory or fixed-rate period, application fees and monthly account-keeping fees. All borrowers are assumed to be taking out a $150,000 loan over 25 years, so if you have a different loan amount or a different loan term, the comparison rate might not be entirely accurate in your situation.

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This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.

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