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shutterstock_119778454When looking to take out or change loans, it may be a good idea to review the potential hidden costs before signing the dotted line. The reason for this is that there may be hidden costs in your loan that may actually make it more expensive in the long term. Below are some of the costs you have to be aware of:

1.     Honeymoon rates. While it isn’t exactly a hidden cost, you have to be aware of whether or not the low interest rate you’re considering is a honeymoon rate, which means that the lower rate only applies during a set honeymoon period. Once that period is over, the rate will revert to the prevailing rates at the time. Depending on the difference between the regular and honeymoon rates, this could translate to several hundreds of dollars in additional payments at the end of the period. Thus when considering a loan with honeymoon rates, it’s important to ensure that you can still afford the loan once the honeymoon period is over.

2.     Application fee. As the name would suggest, this is a fee you pay when you’re applying for a new loan. Expect to pay anywhere from $400 to $750 for this. On top of this there may be other fees and charges that come into effect when applying for a home loan so speak to your mortgage broker directly to learn the full list of expected charges that will apply to you. 

Whilst speaking to your broker about these application fees, ensure that you also enquire about professional package loans, where you only pay one annual fee for all of your banking needs.

3.     Product switching & loan variation fees. During the course of your loan, there is often a fee if you choose to change certain features of your loan or switch loan products. Features that may incur a fee when changing include:

a)    The repayment options between ‘interest based’ and ‘principal and interest’

b)    The interest rate from variable to fixed, or vice versa

Check with your lender or mortgage broker to make sure that you are aware of these fees before proceeding.

4.     Fixed rate break costs. This is found in fixed rate loans, and refers to the payout fees that the lender will charge you if you:

a)    Pay your loan in full prior to the end of its fixed term, or

b)    Switch to a different loan during the fixed term, or

c)    Make extra repayments over the approved amount by the lender during the fixed term

The name of this ‘break cost’ may vary amongst lenders so ensure that you thoroughly read the conditions of the loan to gain a comprehensive understanding of these charges, should you ever wish to refinance or pay off your loan before the end of the term.

5.     Ongoing fees. This refers to the fee that you will pay the lender on a monthly or annual basis for managing your loan. The actual cost of the fee may vary from lender to lender, but it is normally around $10 per month on average.

6.     Discharge fee. Just because you’ve paid your home loan in full doesn’t mean that you no longer have to shell out extra cash. The discharge fee is charged after the full payment of your home loan. The lender uses this to cover the legal costs of terminating the loan. The cost may be higher if government charges are included. All in all, expect to pay anywhere between $300-$500 for the discharge fee and maybe more with some lenders.

These hidden costs may easily add several thousands of dollars onto your home loan. It is therefore recommended that you seek professional advice about these fees and charges before making a decision. A professional mortgage broker may be able to help you avoid these hidden costs by providing you with all the information you need about the various home loans available to you. In addition, they may be able to negotiate on your behalf in order to have some of these fees waived or discounted (e.g. discharge fee).

All in all, take the time to seek the advice of a mortgage broker and thoroughly review the loan agreement so you know what the potential hidden fees are.

Written by Duncan McKinnon.