Home loan fee fest

By Nila Sweeney

Establishment fees, lenders mortgage insurance, stamp duty, conveyancing fees, inspection fees and ongoing fees – where does it end? Your Mortgage examines what you should expect to pay and how to minimise the pain.

It’s not unusual for first homebuyers to underestimate the total costs involved in buying a home. The list of fees and charges you’re likely to come across appears endless, and can quickly punch a large hole in a budget you otherwise would have had for luxuries such as furniture, appliances, electricity… you get the picture!

Don’t think that a simple 10% deposit is going to put the keys to the front door in your hand. There is a virtual minefield of fees that you need to walk through and not all of them are avoidable. The reality is that you’re likely to require close to 20% of the purchase price of the property to make it to the front door without additional debt. Why is this so? Read on.

Home loan fees 
There are fees for establishing a loan, more to maintain it and then some to wind up the loan. Home loan fees provide an excellent source of revenue for lenders – on top of your regular repayments.

Just for starters 
To begin with, your loan is likely to attract an establishment fee in the vicinity of $600. Sometimes this fee is waived or reduced if the lender is running a special, but $600 is the norm. Some lenders will call this fee an application fee. Others will describe it separately as legal and valuation fees.

Lenders often require this amount to be paid when you apply for your home loan. If this is the case, it’s important to know how much, if any, is returned to you if your application is not successful for whatever reason.

Lenders are likely to look at a number of issues when assessing your application, and no two lenders are the same. The three broad categories of activities lenders will undertake at this stage are to:

  • determine your credit worthiness
  • value the property you are offering as security for the loan, and
  • prepare the lending documentation

Different lenders describe their fees in different ways. Some lenders like to quote a single figure, while others break their fees down into two or more categories. When lenders advertise ‘no establishment fees’ it is always worthwhile to see whether legal and valuation fees have been listed as a separate charge. Your overall saving might only be a couple of hundred dollars.

As you can see, it is the total startup cost of the loan that is important. Read the fine print to see if there are settlement fees or securitisation fees (payable on some securitised loans). Regardless of what these fees are called, if they exist, you will need to pay them.

Their insurance, not yours 
Lenders mortgage insurance may be required to protect your lender (not yourself) in the event that you default on the loan and the sale of the property doesn’t cover the outstanding balance on the loan. This type of insurance is generally required if you need to borrow more than 80% of the value of a property. It may also be required for lower loan to value ratios (LVR) depending on the nature of the property and the type of loan you have chosen.

The premium you pay for lenders mortgage insurance is based on a sliding scale that takes into account the LVR and a number of other factors. The greater the perceived risk the loan presents, the higher the premium you are likely to pay. Typically, lenders mortgage insurance premiums cost between 0.8% and 1.5% of the loan amount, but the precise calculation of lenders mortgage insurance isn’t publicly available. Fortunately, you only need to pay lenders mortgage insurance for the first year of your loan.

Stamp duty, round one 
The government doesn’t mess around when it comes to putting out its hand for a piece of the action. Not only do you have to pay stamp duty on the loan, you also have to pay stamp duty on the property itself. Naturally enough, stamp duty on the loan is based on the loan amount. Stamp duty rates are complicated and you are advised to contact the Office of State Revenue in your state, or use the stamp duty calculator on the Your Mortgage website to determine how much this will set you back.

Exemptions and reductions on stamp duty rates are available; again, you are advised to contact the Office of State Revenue in your state.

Home loan fees 
If you thought the fee situation was already getting a little silly, take a deep breath and read on. The following 17 fees could all apply to you during the course of your loan depending on the features you use. Some are avoidable, but many are not.

Additional repayment fee 
Despite wanting to pay off your home loan as quickly as possible, some loans – typically of the fixed interest rate variety – will charge you a set fee to make an additional repayment. While the ability to make additional repayments should be a right and not a privilege, some lenders will charge up to $75 for letting you do it. Cost: around $75

Bank legal fees (or settlement attendance or disbursements fee) 
This is the fee charged by the lender for a solicitor to be present at the settlement to let go of the bank’s money. This will depend on your lender as to whether the fee is necessary. Cost: $100–300 

Bank cheque fee 
Often when you buy a house, the vendor will have a list of things they want paid, such as outstanding rates or water bills, to allow them to clear the property at settlement time. Your bank can pay these bills from your purchase cost via bank cheques. Cost: around $10–15 per bank cheque

Break costs 
These costs usually apply if you try to get out of a fixed rate loan before the fixed period expires. Normally, this is only something you would contemplate if variable interest rates fell and you were stuck paying a much higher fixed rate. Lenders have different ways of determining break costs, but their calculation usually takes into consideration the movement in interest rates from when the loan began to when it was exited, and the outstanding balance on the loan. If you are breaking because the variable rate is a lot lower than the fixed rate you locked into, expect to pay a hefty fee. Cost: varies between lenders, from a few hundred dollars to thousands

Combination loan fee 
A common feature with many loans is the ability to split your loan into fixed and variable components. That is, part of the loan is taken at a fixed rate and another part applies the current variable interest rate. In times of interest rate uncertainty, loans such as these can smooth out fluctuations in minimum repayment amounts. Many lenders offer split loans for free, while others may charge up to $600.

Deferred establishment fee 
One of the true ‘hidden nasties’ in loans today, the deferred establishment fee is an amount charged by lenders to borrowers who exit a loan within the first three to five years. This fee stops borrowers jumping from one honeymoon loan to the next. Expect to pay anything up to the cost of a normal establishment fee of $600. Read article on exit fees on p74 for more details.

Direct debit fee 
One of the first things your lender will likely ask you to do when you take out a loan is to establish a transaction account with them, and possibly even a credit card. Lenders want your business, and if you need to make your repayments from an account with another lender, you are likely to be charged a direct debit fee of up to $3.50. Make your repayments weekly, and this adds $15 a month to your repayments.

Document preparation fee/legal charges 
Your lender may charge a fee to prepare your home loan documents before the contract is approved. Cost: $200–300

Exit fees 
These are covered separately under break costs, mortgage discharge fee and deferred establishment fee.

Free transactions 
No, you aren’t charged for free transactions, but they are an important consideration. A number of loans now have the functionality to act as your transaction account, so the number of free transactions you are permitted each month can make a difference to your overall cost of banking.

GiroPost fee 
For customers that don’t have ready access to a lending institution and don’t want to use direct debit, Australia Post offers a facility with a number of institutions where payment can be made at any of its offices. A withdrawal fee of up to $1.50 applies for using this service.

Internet transaction fee 
Remember when internet banking started and the lenders advertised that it would result in fee-free banking? It hasn’t, and transactions conducted via the internet can still cost you 20 cents a transaction.

Late payment fee 
This is a fee you hope to avoid. If you fall behind in your payments, you are likely to be penalised. This could take the form of a higher interest rate being charged on the outstanding amount or a flat fee that becomes payable if the payment isn’t made within a set period of time.

Mortgage discharge fee 
This is your lender’s last grab at your cash before you wave goodbye. It is the charge payable to transfer ownership of the property to you when the loan has been repaid. It covers the lender’s legal and administrative costs. Government transfer fees are generally paid in addition to the quoted discharge fee.

Ongoing fee 
This is the fee charged by many lenders for simply having a home loan. These are generally around $8 a month and are simply added to your outstanding amount. Note that not all lenders charge an ongoing fee.

Over-the-counter fee 
In the bid to cut costs, lenders discourage over-the-counter transactions by encouraging the use of ATMs, EFTPOS, telephone and internet banking. Fees can be around $1.50 per transaction.

Portability fee 
This fee applies if you decide to jump ship and move to a new property, taking your home loan with you. Not all home loans are portable in this manner, but when they are and a fee is payable, you can expect to pay between $150 and $400. This is significantly less than paying out the existing loan and establishing a new one, but there may be restrictions on the timing of the transfer of property that could affect you.

Redraw fee 
As the name suggests, this is the fee charged for withdrawing any additional funds you have available with your home loan. Some lenders offer a specific number of free redraws a year, after which a fee applies for each additional redraw. This could be anywhere up to $50. Another factor to consider is whether there is a minimum redraw amount.

Refix fee 
This fee is payable if you have a fixed interest loan and wish to lock in a further fixed period at the end of the original term.

Switch to fixed fee 
The fee payable to move from a variable to a fixed interest rate loan.

Security guarantee fee
If a guarantor is putting up security for your home loan, you’ll be charged a fee. Cost: usually around $200 per borrower named on the loan account

Rate lock fee 
A fee paid by fixed rate borrowers on application for a mortgage. By paying a rate lock fee, your rate will be locked from application and will incur no other increases before you begin your first repayment. Cost: around $400

There are likely to be many more fees that exist in the fine print of your loan document. Read it carefully and determine in your mind which ones are likely to apply to you over the course of your loan.
Property purchase fees 
Having survived the multitude of home loan fees, you are finally dealing with bricks and mortar. While not as varied as home loan fees, the additional costs associated with home ownership certainly add up – and are all payable before you walk across the threshold for the first time.

Stamp duty, round two 
Yes, the government is back for another round of stamp duty, and this time it means business. If stamp duty on the loan itself seemed painful, then stamp duty on the property itself can be lethal. It is worth talking to the Office of State Revenue in your state to determine if you are eligible for any reduction in stamp duty.

Conveyancing costs 
Conveyancing is the transfer of ownership of the property from one party to another. This involves the contract of sale, searching for documents on the property to ensure no money is still owing on it, that the property matches the plan on the title and that the vendor is free to sell the property. Expect a professional conveyancer to charge around $1,000 to do all of this, depending on the complexity of the work performed.

It is possible to perform the conveyancing yourself, and kits to perform this are available from the Law Society or large bookstores.

A word of warning: any mistakes you make on your conveyance are your own fault, whereas a professional conveyancer or solicitor has indemnity insurance to protect themselves (and ultimately yourself) if they get it wrong.
Inspection issues
While not typically a necessity, it’s wise to get the following inspections performed on a property before you purchase it.
  • Building inspections Costs for a qualified inspection can range considerably from $300 to over $1,000 depending on the type, size and purchase price of the property you are considering.
  • Pest inspections These will set you back around $100. There are standards that exist for pest inspections, so ensure that the one you order meets the criteria. This includes all timber fences, the interior and exterior of the roof and floor.
  • Council building inspections These are sometimes demanded by lenders and are a good idea regardless. A council building inspection will determine if any unauthorised work or additions have been made to the property and will set you back around $50.
  • Land survey For the princely sum of around $400 you can determine whether your home is safely contained within the boundaries of the land and will indicate any easements or encroachments that affect the property. The land survey is compared to the plans the council has on file to determine if any differences exist.
No more fees, please 
You’re almost at the end of the fee fest and have probably added a couple of thousand dollars, if not more, to the estimated cost of buying your home.

A final word to the wise: even if you’ve raided your nest egg to get this far, don’t try to save dollars by forgetting about home and contents insurance. This fee is just as important as the others you have paid so far – even more so as these types of insurance protect the home you have gone to so much trouble to purchase and the items you fill it with. Not having insurance is a false economy. It isn’t very expensive and provides you with serious amounts of peace of mind.

Where to now? 
Your Mortgage receives a number of e-mails from first homebuyers who manage to scrape together a 10% deposit and begin to search in earnest for the home of their dreams. Oblivious to the fees and charges described above, they believe that they can borrow 90% of the value of a property and literally be handed the keys to the front door. If only home ownership was this simple.

Having reviewed the numerous fees and charges we have documented, hopefully you can understand why we believe an amount equal to 20% of the purchase price of a property is required to cover these costs. To avoid having to pay lenders mortgage insurance, you will need a 20% deposit – as well as having enough left over to pay for the additional fees and charges we have described. This strategy requires a serious savings plan, but can save you from paying lenders mortgage insurance – one of the largest avoidable home ownership costs you’re likely to encounter.