Everything You Need to Know About Lender’s Fees
Before buying a property, you need to know about the hidden fees that lenders charge. These often get added onto your mortgage. Don’t assume that you need only worry about the deposit when getting a home loan.
Do you know the answer to the question of “what are the additional costs involved in buying property?”
Most of you probably already know about stamp duty. This is a charge that the state levies on every property purchase. You may even know that some buyers can get concessions on these fees.
Of course, there’s also the monthly costs associated with running a property. Utilities, council rates, and your monthly bills all add up.
But did you know that there are several hidden lender’s fees that can trip you up?
Lenders make more money than you’d expect out of your mortgage. The interest they charge isn’t their only source of profit. In fact, hidden lender’s fees often cost you thousands of dollars. Moreover, you may have to deal with some of them after you’ve taken out your mortgage.
So, what are these hidden lender’s fees? This article offers a useful rundown of the key fees to watch out for.
Fee #1 – Mortgage Registration
Your lender isn’t the only interested party involved when you borrow money. The local government also needs to know about your mortgage. As a result, your lender has to register the mortgage with the relevant local authority.
This requires a fee, which your lender usually passes onto you. Moreover, this lender’s fee changes depending on the state and the cost of the property. It usually falls within the $100 to $200 price range. However, you may pay more when buying a property worth over $1 million.
On the plus side, some lenders waive this fee as part of the mortgage package. This usually happens if you’re able to provide a large deposit that increases the lender’s confidence in you.
Still, it’s not a huge fee. But it may catch you out when you’re focused on dealing with all of the other fees related to buying a home.
Fee #2 – Lender’s Mortgage Insurance
Lender’s Mortgage Insurance (LMI) can end up costing you thousands of dollars. It typically becomes a factor when you provide less than 20% of the property’s value as a deposit. This makes you a high-risk borrower in the eyes of your lender. As a result, they’ll take out LMI in an effort to protect themselves in case you default on the loan.
LMI usually takes the form of a single payment, which you make at the beginning of the loan period. However, some lenders allow you to capitalise LMI onto your mortgage. This saves you a few thousand dollars in the short term. But it also results in higher monthly mortgage repayments. Plus, you have to pay interest on the LMI, which means you spend even more money.
This is one of the easiest lender’s fees to avoid. All it takes is a little patience. Focus on saving a large enough deposit so you don’t have to pay LMI on the purchase.
You may also be able to rely on a guarantor to make the deposit a non-issue. This is somebody, usually a family member, who puts their own property up as security on your loan. A guarantor can improve lender’s confidence in a borrower, which could cause them to strike out the LMI they would have charged.
Fee #3 – Establishment Fees
Many people confuse establishment fees with registration fees. But they’re not the same thing.
Lenders charge establishment fees for preparing the documentation related to your mortgage. Think of it like a one-off admin fee. Usually, it falls within the $600 range. However, lenders may charge higher establishment fees for complex applications. Moreover, some lenders waive the fees entirely. This is usually done as an attempt to attract new customers. However, some lenders waive the fee for customers who can pay a large enough deposit. Again, it’s all about improving the lender’s confidence in you as a borrower.
This is also one of those lender’s fees that has several names. Some lender’s use the term “application fee”, whereas others may say “approval fee”. It’s all the same thing. However, it’s worth speaking to your lender about the purpose of the fee if you’re unsure.
Fee #4 – Property Valuation Fees
Unfortunately, an estate agent’s valuation of a property doesn’t hold water with most lenders. They want to carry out their own independent valuations before figuring out how much you can borrow. This means bringing in a valuer, which comes at a fee. Many lenders pass this fee onto you.
Again, this is another lender’s fee that may get waived if you pay a high enough deposit. If you don’t, expect to pay somewhere in the region of $200. However, you may also want a valuation completed for yourself, especially if you want to challenge the lender’s valuation. This isn’t a direct lender’s fee, but it’s related to your mortgage application. Getting your own valuation will cost about $400.
Fee #5 – Service Fees
You’ll pay the above lender’s fees before taking out your mortgage. However, many lenders also charge ongoing fees, especially on mortgages that have a lot of useful features.
These fees usually fall under the service fees banner. They’re commonly found on mortgages that offer additional features, such as offset or redraw accounts. Such features can help you to repay your mortgage faster, which would mean that the lender makes less money on interest payments. Service fees cover some of that loss.
The way you pay your service fee may differ depending on the lender. Some charge a monthly fee, whereas others charge annually. They don’t usually cost much more than $100 per year.
Fee #6 – Rate Lock Fees
When you apply for a home loan, you have a choice of a fixed or variable interest rate. A variable rate changes alongside the national interest rate. This can sting you when the rate goes up, but it reduces your monthly repayments when the rate goes down.
A fixed rate involves locking a rate into place for a set number of years. Most lenders offer fixed rates up to a five-year limit. Fixed rates prove advantageous if you believe the national interest rate will increase in the coming years. With the proper timing, you can fix your mortgage at a low interest rate. This reduces your monthly repayments until switching to a variable rate proves advantageous.
Unfortunately, fixed-rate loans come with fees attached. The first of these is the rate lock fee. This is a small lender’s fee that you have to pay to fix the interest rate. The amount depends on the length of time you want to fix the rate, your lender, and your home loan product.
Fee #7 – Break Fees
Break fees are another lender’s fee attached to fixed-rate loans. However, they don’t become a concern unless you decide to end your loan early.
Imagine that you have a three-year fixed rate loan. During the second year of the term, you find a superior loan product. If you want to make the switch, you have to break the fixed term you have with your current lender. Most charge break fees to make up for any money they may have lost because they fixed your rate.
On a similar note, you may also have to pay lender’s fees for early repayments on a fixed-rate loan. This is because most lenders limit early repayments on fixed-rate loans. Additional repayments, after a certain point, tend to incur a charge. Both these and break costs aren’t issues when you have a variable rate loan.
Fee #8 – Redraw Fees
A redraw facility can help you to save more money. Here’s how it works. With a redraw facility, you can make extra repayments on your home loan. These extra repayments go into an overpayment account. The key is that you have access to this overpayment account. You can redraw the money you’ve overpaid. This proves useful in emergency situations.
However, the money in that account also accrues interest at the same rate as your home loan. This is often a higher rate than you’d get from a regular savings account. As a result, making extra repayments into a redraw facility benefits you over time.
The lender’s fees come in when you try to draw money out of the facility. Some lenders charge a fee, usually of around $50, for each withdrawal. However, some don’t charge anything at all. It depends on your loan package.
Fee #9 – Offset Fees
An offset account is a bank account that your lender links to your home loan. The money you put into the account reduces the principal of the loan. As a result, your interest payments decrease. At the end of the loan term, the money in the offset account pays the rest of the principal.
Imagine you have a mortgage for $500,000. However, your offset account contains $100,000. This means you only make monthly repayments on a principal of $400,000. That $100,000 goes to the lender when you’ve repaid $400,000 of the loan, plus interest.
However, much like with a redraw account, you can take your money back out of an offset. This increases the principal of the loan based on how much you withdraw. Some lenders attach a fee to this facility.
Fee #10 – Late Payment Fees
Assuming you don’t run into money troubles, you won’t have to worry about this particular lender’s fee.
But if you miss a repayment, your lender may charge a fee on top of the missed repayment. These can build up if you miss several repayments in a short period. Moreover, missing your repayments puts you at risk of defaulting on the loan.
Speak to your lender if you think you may miss a repayment. They may be able to help you to rearrange your repayment schedule so you can avoid such fees.
The Final Word
Buying a new property isn’t easy. As you can see, there are several hidden lender’s fees that may sting you. When combined, these fees can easily cost you tens of thousands of dollars over the lifetime of your loan.
You can avoid some of them. A higher deposit means no LMI. Plus, you may not have to pay as many set-up fees. Clever handling of the mortgage that you have may help you to avoid some of the other fees on this list.
However, budgeting for these fees is the best option. As long as you’re prepared for them, they won’t affect your goal of owning your own property.