Mortgage Overpayment Penalties – Why Lenders Charge You for Overpaying
There is expected to be a lot of changes made to the terms and conditions surrounding repaying your home loan after 1 July 2011. For example, lenders will not be able to charge exit fees on loans taken out after 1 July 2011, even if the borrower closes their loan account before the end of the loan term.
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New Government Exit Fee Legislation
The Australian Federal Government legislated in March 2011 that lenders could no longer levy a charge against a home buyer for switching home loans. This action was taken by the government in an effort to make it easier for borrowers to change from one mortgage loan to another if their needs changed, or a better home loan deal became available. Before that time, lenders have been able to discourage borrowers from switching to a better home loan deal, especially in the early years of their home loan, by imposing high exit fees.
Lenders argued against the government taking such action, stating that the exit fees were in place to protect their investments, but the government remained adamant that the move would increase competition and therefore ultimately be of benefit to both the borrower and the lender. The new legislation will mean that if you are repaying your home loan and you come across another loan containing similar features at a lower interest rate for example, you will be able to switch to the better mortgage without having to pay a fee to your existing lender to close your loan account.
Early Repayment Discouraged By Lenders
Lenders have been charging exit fees to discourage you from repaying your home loan early, because if you pay out your loan before the end of the term, the lender doesn’t make as much from you in interest and fees. Home loans are a long term investment for both the borrower and the lender, and when offering a mortgage loan to a home buyer the lender can predict reasonably accurately the amount they will earn in interest from each loan and each customer.
As lenders use compound interest to calculate the cost of lending, they need to know exactly how much is being earned throughout the term of the loan, as compound interest is interest being charged on interest, and so the exact amount depends on the repayment term and loan amount. When additional repayments are made above the minimum amount, this directly reduces the principle loan amount, and reduces the compounding effect taking place.
Contemporary Home Buyers Demand More Choice
The modern home buyer takes a much different view of a lender than their parents did. In the past there was not the same inclination to change lenders in order to get a better deal as there is today. As a result many lenders have stopped enforcing a penalty for a home buyer making additional repayments over and above that required to be paid. This has allowed home loans to be repaid earlier than previously agreed in the contract and as a result borrowers can save many thousands of dollars over the life of the mortgage.
Another popular modern home loan feature is redraw, where you can withdraw money from your home loan if you have made additional repayments. This gives you the freedom to make additional repayments, without having to worry about losing access to those funds in an emergency. Lenders are able to offer this service by charging a slightly higher interest rate on a mortgage containing such features, to cover higher loan maintenance costs, and the possibility of lost income for the lender.
However, borrowers are more than willing to pay a slightly higher interest rate, in return for being able to pay off their mortgage earlier and save themselves money. While home loans without these features are cheaper, you will need to make sure that your mortgage repayment plan doesn’t include additional repayments, because if it is not an included feature, you will usually pay high fees each time you make an additional repayment, or redraw.
Lenders typically calculate their exit fees based on your loan type and term, where the exit fee decreases each year you hold your loan, and levels out to a standard fee at around five years. However, if you want to find out how you can avoid any more unnecessary fees on your home loan, find a mortgage broker in your area who can help with your home loan search and application.
Repaying your home loan was once simply a matter of keeping up your repayments, and lender fees for additional repayments were just par for the course, however, borrowers are now much more sophisticated and loyalty has gone out the window, plus the government is right behind borrowers looking for a better deal.
Related posts:
- Mortgage Arrangement Fees, a Necessary Charge
- Early Repayment Penalties Explained
- Mortgage Penalty Fees – Why they are Imposed?
- Non Bank Lenders – Are They Safe?
- Why Do I Need Lenders Mortgage Insurance When Refinancing
- Watch Out For Predatory Lenders
- Tips to Avoid Lenders Mortgage Insurance
- Home Loan Exit Fees banned on new variable rate home loan
- How to Avoid Lurking Lenders
- Mortgages and Fees
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