black and pink Exit signage

When you get to the end of your home loan (or you refinance) there may be costs involved in ending the process known as exit fees.

We take a look at what they are likely to cost you.

What are exit fees?

Exit fees are charged by the lender when a borrower ends the loan or refinances to another lender. Exit fees were banned on new home loans from 1 July 2011 by the Gilliard Government, but not all types of exit fees were impacted by the ban (i.e. discharge fees remain, as do break fees that relate to early repayment of a fixed rate component of a loan).

Exit fees can be in the form of fixed-rate break costs, discharge fees, or early exit fees. Lenders often charge this fee to cover the cost of terminating the current loan offer and to prevent borrowers from changing their home loans frequently.

Why do banks charge exit fees?

There are two common reasons why banks charge exit fees when you decide to terminate your current deal.

The first reason is to recoup the 'origination' costs they made when they got you onboard. It has been said that if you divide the dollars spent by a major bank on advertising a year by the value of loans they sell in that year, you can get a figure around $600. That is, it costs a bank $600 to sign you up in advertising costs alone. With some lenders offering no upfront fees on their home loans, the only way to recoup the potential loss is to charge you with an exit fee.

Another reason is that many lenders view promotional features such as the honeymoon period as an added cost. It costs them interest dollars to get you in the door and they hope to get it back over the duration of the loan – from you. If you are not there after a couple of years, then the next best way for them to get these costs back is by charging you with exit fees.

When are exit fees charged?

Lenders typically charge exit fees if the termination of your current home loan deal costs them money.

Break costs, for instance, are charged when you break a fixed loan term.

Lenders typically borrow money from the wholesale money markets through the Bank Bill Swap Rate (BBSR), which is locked in at the same time as your fixed rate. As you sign a fixed rate deal with your lender, they also enter a contract with a third party to lock in their funding costs at a fixed rate.

Breaking a fixed rate term means your lender will also have to break their contract with a third party and make a loss, which they will end up passing to you.

To calculate how much you will be charged, lenders usually take into consideration the difference between the wholesale rates at the time when you entered a fixed contract and when you decide to terminate the fixed term. The result will then be multiplied by the loan amount and the remaining term of the loan. Your Mortgage has a guide explaining in detail how break costs are calculated.

Lenders can charge you a fee even if it does not cost them money. As mentioned earlier, lenders see promotional rates as cost.

Honeymoon loans or discounted variable rate loans, for instance, have low rates that last for six or 12 months and are then rolled into a standard variable rate. Oftentimes, these kinds of loans have no establishment fees.

However, some borrowers take advantage of this by pulling out of it as soon as the cheap rate neared the end of its term. They would then jump into another cheap, introductory, no-front-end-fee mortgage and try to repeat the procedure.

Consequently, lenders wised up and many have now put exit penalties on lots of their products.

Your exit penalty can be based on the interest rate you are paying at the time of your exit, not on the rate operating at the time you took out the loan. And it is on the balance you owe at the time you pull out. In other words, if rates have risen since you took out your loan it’s going to be more painful than if they have been stable or fallen.

But it can get worse. Some will charge you on the full amount borrowed, not the principal balance outstanding at the time of the exit.

How expensive are exit fees?

There are many types of exit fees and some are already mentioned earlier in this guide.

A discharge fee, for instance, could cost you from $150 to $400. This fee is basically charged to cover the lender's legal costs.

There will usually be other penalties. One is based on interest differential – the difference between your interest rate at the time you took out the loan and the rate prevailing when you exit. This is usually the case when you break a fixed term.

There is also a full interest penalty. This is the full amount of the interest due on a fixed-rate mortgage if it were continued for the full duration of the original term.

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