Home loan and mortgage fees you should know about

Personal Finance Writer · 29 September 2021
If you’re in the market for a home loan, it can be tempting to focus on the interest rate you’ll pay. But there are good reasons to take a close look at mortgage fees and charges too.
Home loan fees
Home loan fees can add up but you may be able to save if you do your research. Image: Andrey_Popov/Shutterstock.com.

Australians have enjoyed a long run of home loan interest rates at record lows. But scratch the surface of a home loan deal, and you’ll find that interest typically isn’t the only cost you’ll face.

Why home and mortgage loan fees matter

Along with loan interest, lenders may charge a variety of home loan fees, and where they apply, it all adds up towards the total cost of the loan.

So, it makes good financial sense to check out any fees or other charges associated with a loan to get a true picture of what you’re really paying. After all, a low rate home loan could come packed with a variety of fees, some of which may not be obvious when you’re browsing products.

To give you an idea of the impact fees can have on the cost of a loan, according to Canstar’s home loan comparison calculator, there’s an overall difference of $4,100 over a 30-year term between the cost of two hypothetical loans with identical interest rates but where one of the loans comes with a $500 one-off establishment fee and a $10 monthly fee.

The main mortgage fees to be aware of

Home loan fees can be broadly broken down into three main categories. Here’s what to watch for. See the table at the bottom of this section for details on how the fee levels mentioned below have been calculated.

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

You may come across application fees described as ‘establishment’ or ‘set-up’ fees. How much you may pay varies between lenders, however, across the Canstar database around 40% of lenders charge application fees* 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 is $504, but there can be big variations, with application fees ranging from $200 to $1,599.

Valuation fees

Your lender may also 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.

While the average valuation fee across the Canstar database is $366, you could be asked to pay anything from $248 to $400.

Legal fees

Lenders may pass on the legal fees they have 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 $396, with the average fee being $316.

Bear in mind, a lender’s legal fees are separate from your own. You will still need to pay legal fees to 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 $225, though where they apply, settlement fees can vary from $99 to $995.

2. Ongoing fees

A variety of ongoing, regular fees may apply to your home loan. Again, what you pay can depend 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 are surprisingly common. Across the Canstar database, 14% of loans charge a monthly fee, with the average cost being $9. However, the range of fees can be anywhere between $5 and $15 per month. This may seem like a small sum, but over the course of a 25- or 30-year home loan, it can really stack up.

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 $366, though it can range from $248 to $400 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 to a different lender. These ‘discharge’ fees can range from $75 to $895, with the average being $316.

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

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Fee type Minimum Average Maximum
Application/Establishment fee $200 $504 $1,559
Annual package fee $248 $366 $400
Monthly fee $5 $9 $15
Discharge fee $75 $316 $895
Valuation fee $150 $249 $360
Legal fee $200 $316 $396
Settlement fee $99 $225 $995

*Source: www.canstar.com.au – 24/09/2021. Based on owner occupier variable loans on Canstar’s database, available for a loan amount of $500,000, 80 LVR and principal & interest repayments; excluding introductory and first home buyer only loans. ^Annual Package Fee calculations based only on package loans. Valuation, Legal and Settlement Fees are often calculated at cost; minimum, average and maximum figures are based on those loans that advertise a fixed value (this fixed value may be an estimate by the lender).

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 MoneySmart website explains, the comparison rate includes the home loan interest rate, while also factoring 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 clear picture of the true cost of a loan, and enables more accurate comparisons 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: 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.

Compare home loans with Canstar

If you’re currently considering a home loan, the comparison table below displays some of the variable rate home loans on our database with links to lenders’ websites that are available for first home buyers. This table is sorted by Star Rating (highest to lowest), followed by comparison rate (lowest-highest). Products shown are principal and interest home loans available for a loan amount of $350K in NSW with an LVR of 80% of the property value and that offer an offset account. Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products.

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