Mortgage Penalty Fees – Why they are Imposed?
Home buyers realise that fees and charges are all a part of the mortgage process, whether those fees are obviously transparent or they are hidden behind an increased interest rate. On the other hand the lender who has entrusted the home buyer with their money looks at the process of imposing fees as an investment. Even though lenders are simply imposing penalty fees to protect their investment, when you know where and why these fees are charged, you will be better placed to avoid them on your loan.
State Custodians Breathe Easy Offset Home Loan
Enjoy low fees and an excellent variable rate with the Breathe Easy Home Loan
- Interest Rate of 6.47%
- Comparison Rate of 6.36%
- Application Fee of $0
- Maximum LVR With LMI: 95%
- Minimum Borrowing: $150,000
- Maximum Borrowing: $1,000,000
Penalty fees are used by a lender to control the performance of their mortgage investments, rather than to control the behaviour of the home buyer. Penalty fees are a means of reducing uncertainty for the lender, by encouraging the home owner to repay their mortgage in a manner that is as close as possible to the terms agreed to in the loan contract. When the mortgage is first agreed to by both the lender and the borrower, the lender predicts exactly what the investment will return for them over the full term of the loan, whether you have taken out a 10, 20, 25, 30 or even 40 year loan. Any changes made to the agreement, changes this prediction considerably.
Exit Fees
For many years, borrowers have been able to refinance their loans if they wanted to move to a better deal or a different lender. If a mortgage is refinanced in the early years of the loan term, it can significantly affect the lender with regards to their projected interest income from your loan. Therefore, early repayment penalties guarantee the lender a minimum rate of return no matter what happens to that particular loan, ensuring their investment has more value.
Such fees and charges have come under a lot of scrutiny in Australia recently, ever since the big banks failed to lower their interest charges when the Reserve Bank of Australia (RBA) was lowering rates to emergency levels during the worst period of the Global Financial Crisis (GFC) from 2007 to 2008. During this period, the Australian government treasurer, Wayne Swan, was urging Australians to switch banks if their bank was too slow in lowering their rates. However, many home buyers found this an uneconomical option because of the exit fee they would have to pay to get out of their current contract. As a result, in 2011 the government legislated to ban exit fees on all loans taken out after 1 July 2011.
High exit fees are particularly prevalent on:
- Introductory loans. When borrowers benefit from a lower interest rate in the first few years after they take out their home loan.
- Fixed rate loans. When the interest rate is fixed for a period, usually between one and five years, so your repayments stay the same.
- Basic loans. A home loan without any extra features, no annual or monthly fees and a very low interest rate.
This is because the lender has made a concession in the form of interest or fees for the borrowers using these types of loans, on the basis that the lender will be able to recoup their interest income after an introductory or fixed period, or over the life of a basic home loan. However, if you close your home loan account during one of these periods, the lender loses all future income from you.
Late Payment Fees
Among the fees and charges you will find in the small print of a mortgage loan is a penalty fee for non-payment, or late payment. This fee is imposed when a partial payment is received on the due date or when no payment at all is made on the due date, even if the repayment is made several days later. These penalties are imposed because a late or partial repayment indicates the home buyer might be having trouble meeting their repayments, and a total default might be approaching. By imposing a fee, the borrower is reminded of the penalty for late payment, and the lender hopes this reminder will stop the borrower making late payments in the future, and make their home loan repayments a priority in their budget. A late repayment also affects the investment income the lender expects to receive, as the money paid in repayments is kept in a fund which attracts compound interest, and if the funds aren’t in that account for the full payment period, this will affect the compounding interest being earned.
Additional Repayment Fees
Many home loans also impose a penalty fee when the home buyer makes an additional payment, or over pays the home loan account. This penalty fee is in place for much the same reason as an exit fee, because it is not in the interest of the lender to have the loan paid off early, as their profit is going to come from the interest being charged on the loan over the full loan term. When you make additional repayments, this amount is deducted directly from the principle loan amount, therefore reducing your loan term and the overall interest you will pay. Even small windfalls like little lottery wins or gifts of cash on your birthday can save you much more in interest than they would earn you if you put the funds in a savings account – plus you’re not taxed on interest saved, only on interest earned.
Use the Home Loan Finder comparison tables to find out more about the penalty fees imposed by Australian lenders, as this can help you decide on which loan features you really need.
Related posts:
- Mortgages and Fees
- Home Loan Exit Fees banned on new variable rate home loan
- Watch out for Hidden Early Exit Fees
- Home Loan Break Costs and Exit Fees
- Exit Fees & Break Fees
- How to Avoid Home Loan Exit Fees
- Exit Fees And Refinancing
- Mortgage Overpayment Penalties – Why Lenders Charge You for Overpaying
- Beat Home Loans Fixed Loan
- Home Loan Exit Fees
Top Home Loans
| Home Loan | Details | Interest Rate (p.a.) | Comp Rate^ (p.a.) | App Fee / Ongoing Fee | Max LVR | Min & Max Borrowing | |
|---|---|---|---|---|---|---|---|
 Loans.com.au - Dream Catcher | A home loan offer with a $0 application fee and one of the lowest available home loan interest rates. | 5.85% | 6.21% | $0 / $375 | 80% | $50,000 / $750,000 |
 
|
 Bankwest Online Home Loan | A low interest rate home loan with a $0 application fee and ongoing maintenance fees. This offer is exclusively available by applying online. | 5.97% | 5.97% | $0 / $0 | 80% | $100,000 / $1,000,000 |
|
 Illawarra Home Loans Bank Beater Home Loan | A low variable rate, beaten down even further by 0.05% p.a. after 5 years. | 6.07% | 6.35% | $0 / $345 | 90% | $250,000 / $1,000,000 |
|
 State Custodians Mortgage Company Standard Variable Offset Loan | Awarded the 2011 Non bank Lender of the Year this feature-packed loan rewards customers with a bonus rate drop of 0.25% after 5 years. | 6.02% | 6.23% | $0 / $345 | 95% | $150,000 / $1,000,000 |
|
Ask A Question