Australian Property News

Banning of exit fees welcomed

Posted on Friday, June 24 2011 at 9:17 AM

The decision to ban exit fees from July 1, 2011, has been welcomed by the comparison website RateCity.

Chief executive officer Damian Smith says while abolishing early exit fees would help some borrowers switch to better deals without being penalised, more can still be done to improve other heavy costs associated with switching mortgages.

"Banning early exit fees on variable home loans won't impact the entire mortgage market because there are other fees and charges which will deter many borrowers from switching," Smith says.

"The most significant cost of switching lenders for many borrowers is Lenders Mortgage Insurance (LMI).

"All lenders charge LMI if you want to borrow 80 per cent or more of the value of the property. It covers the lender – not the borrower – in case you default on your mortgage. The problem with LMI is that if you switch to another lender the LMI policy is cancelled and you’ll have to pay for a new policy with your lender, which can be very costly.

"For instance, for a $300,000 property and a 10 per cent deposit, borrowing $270,000 would incur LMI costs of about $4500. And the more you borrow, the greater the costs, as a $600,000 property with a 10 per cent deposit would mean an LMI fee of about $17,500."

The banning of exit fees comes after months of debating finally forced the Senate to do something about it.

There are currently two major LMI providers in Australia, QBE and Genworth Financial. Because there are only two companies, chances are you're actually paying for the same policy, for the same property, to the same insurance provider.

"Whether it's added to the loan balance or paid up front, these costs can outweigh the value in switching lenders," he says.

"While we won't necessarily see the real impact of the exit fee ban until 2012, it will no doubt open the door for more borrowers to be able to switch if they choose to."