Home loan and mortgage fees you should know about

If you’re looking for a home loan, it can be tempting to focus only on what interest rate you’ll pay. But you should also take a close look for any mortgage fees and charges as well.

Lenders may charge a variety of home loan fees and they can add to the total cost of buying your new home.

For example, according to Canstar’s home loan comparison calculator, you’ll pay an additional $4,100 over a 30-year term on a home loan with a $500 one-off establishment fee and a $10 monthly fee, compared to a loan at the same interest rate but with no additional fees or charges. That’s regardless of the amount borrowed.

So let’s take a closer look at what fees and charges may be attached to a home loan.

The main mortgage fees to be aware of

Home loan fees can be broken down into three main categories – upfront, ongoing and at the end of a loan – so here’s what to watch for.

1. Upfront fees

When you first take out a home loan, the lender may charge a variety of upfront fees. These are one-off fees, but they can still take a bite out of your home-buying budget. Upfront fees can include:

Application/loan establishment fees

When you set up a new home loan you’ll usually be charged an application fee, often described as ‘establishment’ or ‘set-up’ fee. How much you may pay can vary between lenders.

Around 44% of lenders on Canstar’s database charge an application fee, at the time of writing, so it may be possible to avoid this cost altogether depending on the lender you choose.

Among lenders that do charge application fees, the average cost was $499, but there can be big variations, with application fees ranging from $150 to $900 among those who charge the fee.

Valuation fees

Your lender may ask you to pay a valuation fee. This covers the cost for a lender to have the home you’re planning to buy professionally valued before your mortgage can be fully approved. You may have difficulty getting the loan approved if the valuation comes in lower than expected. While the average valuation fee across the Canstar database is $254, you could be asked to pay anything from $200 to $350.

Legal fees

Lenders may pass on the legal fees they’ve notched up for the work involved in preparing formal loan documents. Among the lenders who pass this cost on across the Canstar database, legal fees range from $200 to $440, with the average fee at $340.

Bear in mind, a lender’s legal fees are separate from your own legal fees. You’ll still need to pay your own solicitor or conveyancer for the work they do reviewing the contract of sale, and transferring the title of the property out of the seller’s name and into your own.

Settlement fee

A settlement fee can be charged when you first take out a home loan, or when you want to top up your current loan with additional funds, or if you decide to refinance to a new loan. On average, expect to pay around $255, though where they apply, settlement fees can vary from $100 to $995.

2. Ongoing fees

A variety of ongoing, regular fees may apply to your home loan. Again, what you pay depends on your lender, and your choice of loan. That said, there are two main fees to be aware of.

Monthly home loan fees

Not all home loans come with monthly fees – also known as ‘loan service fees’, but they’re surprisingly common.

Across Canstar’s database, 12% of loans charge a monthly fee, with the average cost at $10. The range of fees can be anywhere between $8 and $15 a month. This may seem like a small amount, but over the course of a 25- or 30-year home loan, it can really stack up.

For example, an average $10 monthly fee on a 30 year loan adds up to $3,600.

Annual package fees

Package home loans typically bundle a number of financial products together such as a home loan, transaction account and maybe a credit card. A potential plus of package loans is an ongoing discount on the home loan interest rate, and it’s often accompanied by additional benefits such as savings on credit card annual fees.

In return for these savings, home owners pay an annual package fee. Among package loans on the Canstar database, the average annual package fee is $349, though it can range from as little as $1 to $399 each year.

3. Fees when you end your loan

Discharge fees

A small minority of lenders may pass on the admin costs associated with ending your loan either when you pay it off in full or if you refinance and move to a different lender. These discharge fees can range from $75 to $795, with the average at $313.

Fee levels among lenders on Canstar’s database that charge/advertise a fee

← Mobile/tablet users, scroll sideways to view full table → 

Source: www.canstar.com.au – 16/05/2023. Based on owner occupier variable loans on Canstar’s database, available for a $500,000 loan amount, 80% LVR and P&I repayments, excluding introductory, first home buyer only and other special condition loans. *Valuation, Legal, Documentation and Settlement fees are often calculated at cost; the values in this table are based only on lenders that advertise a fixed value.

How to measure the true cost of mortgage fees

Clearly, there are plenty of fees to be on the lookout for – and remember, fees can vary between lenders and even among loans with the same lender. So, how can you work out which offers better value – a loan with a low rate and high fees, or a loan with a more expensive rate that charges little or no fees?

Fortunately, there is a way to get a better sense of the impact of mortgage fees so that you can compare like with like. The answer lies with home loan comparison rates.

As the Australian Government’s MoneySmart website explains, the comparison rate includes the home loan interest rate and factors in the cost of most fees and charges relating to a loan.

In this way, it brings the overall cost to a single percentage figure – that’s the comparison rate. It helps you get a clearer picture of the true cost of a loan, and enables you to get a more accurate comparison between home loans.

Another point to bear in mind is whether additional fees offered by the loan can justify the fees charged. An example could be paying a higher fee for a loan that offers an offset account which enables you to reduce your interest costs. In this instance, it could be worth calculating your interest savings and whether they outweigh the higher fee.

Other home loan fees you need to know about

Some loan fees aren’t factored into the comparison rate as they may only apply in certain circumstances. These typically include:

• Lenders’ mortgage insurance (LMI): Not a fee, as such, but a potentially hefty cost incurred by some borrowers with a low deposit when taking out a home loan.
• Late payment fees, also called a default fee, which can be payable if you fall behind with a regular repayment.
• Break fees, or break costs, usually kick in if you bail out of a fixed rate home loan before the fixed rate term is over.
• Redraw fees that may apply if you use a redraw facility.

The main point is to check out the fees you may be asked to pay on a home loan, use the comparison rate to get a clear idea of the cost of different loans, and understand your style of home loan management to know which other types of fees you could be asked to pay.

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