The first time many borrowers hear about exit fees is when they're hit with them. Perhaps they've had their loan for a few years, noticed the competitiveness of their existing loan start to slide and have determined that better deals are available.
This could mean a move from a fully featured loan (with features never fully used) to a no-frills loan, or a move from a basic loan with minimal features to one with every feature (with the rationale that the new loan will better suit the lifestyle of the borrower). Some borrowers believe that chasing the lowest interest rate each year will save money. Once you factor exit fees into the equation, you can usually forget this strategy!
The biggest problem with many loan contracts is a lack of transparency on all the fees, costs and interest payments that you are, or could be, liable for. By the time exit fees are levied it's too late, so the best advice is to understand all the costs behind a loan before signing.
Going for the one with the cheapest upfront fees or lowest initial interest rates isn't always going to pay dividends, particularly if you aren't sure what your plans are for the near future.
What are exit fees?
Exit fees come in various shapes, sizes and disguises. You need to learn to read the small print before signing and identify anything which could cost you money down the line should you want to refinance or pay off the loan.
'Deferred establishment fee' is a typically broad and vague term that can cover a multitude of exit costs. Others include early redemption charges, administration charges, sealing fees, deeds release fees, clawback charges and discharge fees. There may also be clauses for rebates of initial incentives, eg any cash-back advanced, or the value of free legal or valuation fees.
Any fee jargon like this in the small print should set off your alarm bells and you should ask the lender for clarification, preferably in writing, of exactly what it might cost you based on your specific situation. Don't accept a vague explanation. Ask for specifics and figures until you are satisfied that you completely understand the implications of early exit from the loan. Planning is the key
Going into so much detail on every loan may seem arduous, but making a plan for your financial near future can help you identify which loans will suit you best. You will never be able to escape exit fees entirely, but committing to keeping the loan for say five years might mean you can take a loan that has high penalties for breaking within the first five years, but much lower costs after that. It may also help you to find a better interest rate or upfront cost package. Katrina Rowlands, mortgage consultant with Mortgage Success, says making a plan and discussing it with your broker is key to this.
"Borrowers should be made aware of fees, charges and future borrowing costs of the loan, as far as can be ascertained," she says. "Certain lenders do have standard deferred establishment fees between one and three years.
"There needs to be a clear financial plan in order to make an informed decision. I will always ask how long they intend to keep the property and will ask their intentions for the next three years. This can make a big difference in the product they use."
Tapping your broker's expertise
Mortgage brokers have been through the lenders' documents many times before. They know the jargon and terminology, where to look for the tricky clauses and the right questions to ask lenders.
This experience can be invaluable in getting the right loan and minimising any potential exit costs.
"Consumers are getting smarter and smarter, but some fees still need to be spelt out," says Rowlands. "There are many pitfalls. Sometimes lenders will still try and charge the exit fee, even if you refinance to a better deal with the same institution. A good broker will negotiate fees with lenders. They can be quite receptive, depending on competition. More and more are now focusing on retaining business. This means they are more likely to waive fees than in the past."
Australian exit fees are high
A recent study by global consulting firm Fujitsu has found that Australian mortgage fees are higher than most other comparative nations, including the UK, New Zealand and Canada.
Martin North, managing consulting director of Fujitsu Consulting, says Australian mortgage providers are charging consumers more to account for higher cost bases within their organisations, compared to those in other countries.
"We discovered that the total cost to consumers in terms of loan fees is higher in Australia. The level of profits made in the mortgage industry is in line with other players internationally, but higher fees and interest margins are needed to balance out higher costs."
North gives several examples of the reasons for higher costs.
"The commission paid to brokers in Australia is nearly twice as high as the UK. Also around 30% of loan applications need reworking in Australia, compared to 5% in the UK," says North.
He emphasises the growing trend for lenders to increase exit fees in order to compensate for reduced application fees. This creates a lack of transparency that has been dealt with by regulation in other countries.
"Upfront application fees are being replaced by less transparent exit fees. They are difficult to identify because they are contingent on events. If you cash in your loan early, you have to pay an exit fee on the loan, plus a discharge fee. You may also be required to pay clawback fees on commission for the loan and also to the broker."
North advocates a more transparent method to spell out exactly what exit costs you will pay. He points to the UK system where regulators are forcing lenders by law to spell out all potential costs on the loan document that then must be adhered to and cannot be changed.
"Regulators in the UK have started to impose strict disclosure regimes on lenders to stop them from specifying one level of discharge fees in the application form and changing that within the next two to three years," says North.
"All loan documents at point of sale should include a full specification of the exit fees that won't change. If you ask five Australian lenders about their exit fee process at present, you will get five different answers."
FIVE QUESTIONS TO ASK YOUR LENDER ABOUT EXIT FEES
1. Are there additional costs if I pay this loan out early?
2. Based on my situation, how much would those penalties be?
3. What sort of a timeframe do they apply to?
4. Under what circumstances would those fees apply?
5. Can I have all the fees and penalties for discharge put in writing?
Source: Katrina Rowlands, accredited mortgage consultant, Mortgage Success
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