Property Investor Tips
Whatever you call them, exit fees sting
Posted on Tuesday, February 16 2010 at 4:11 PM
Homeowners and investors refinancing their loans need to understand the exit costs associated with changing a loan or lender, according to Smartline Personal Mortgage Advisers.
Smartline estimates that up to 40 per cent of home loan applications are from people looking to refinance, for reasons including consolidation of debt and accessing a lower interest rate or a better deal.
Major lenders have introduced home loan exit fees over the past few years, primarily as a strategy to discourage people from refinancing, Smartline managing director Chris Acret says.
He says exit fees are often referred to as 'early termination fees', which is the cost of closing the loan. Different banks use different terminology and early termination fees can also be known as 'deferred administration fees', 'deferred establishment fees' or 'early repayment fees'.
"If you look back five years or more ago, banks rarely charged exit fees," Acret says. "Now, there are very few lenders who don't charge them."
"It's really about forcing the customer to stay with them for as long as possible."
"A home loan doesn't really make much profit for a bank for the first two years; those first couple of years are just 'break even'. With the average loan term now about three and a half years, banks only have a window of about one and a half years to make a profit from that loan."
There can be a massive disparity between the exit fees on different loans from different lenders, Smartline says.
Some lenders, generally larger banks, charge a flat fee of $750 to $1000 while others, generally non-bank lenders, may charge in the order of 2 per cent or 2.5 per cent of the loan balance. On the average $300,000 loan, this could mean a charge of more than $6000.
Acret says borrowers need to think about their future when choosing a loan.
"Exit fees generally apply in the first five years of the loan, so think about your plans for the property and expected timeframes."
"If there's a real chance you may look to exit out of the loan within a few years as a result of either selling or refinancing, it may be worth considering the issue of exit fees a little more."
"Home loans with a slightly higher interest rate often have lower or no exit fees, so may actually end up being a cheaper option if you are looking to repay early."
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