Home Loan Exit Fees
What are Home Loan Exit Fees?
Most of the time when you sign up for a home loan regardless of whether you choose a fixed rate loan, or a variable rate loan, you will be tied into the contract for a set period of time. Some lenders tempt customers by offering them a lower rate of interest than normal if they agree to fix the contract with that lender. Fixed term home loans generally last between 2-8 years depending on where you look.
What are these exit fee charges for, and is there anyway we can avoid them without being tied to our property?
Once this agreed period is up you will automatically move onto your lenders current standard rate of interest, unless you decide to once again fix your deal with your current lender, or decide to move the loan elsewhere. The decision you take will depend on the economic climate, and state of the mortgage market at the time your fixed deal ends.
These fixed periods give customers a better rate of interest than they would pay if they were on their lenders standard variable home loan rate, and the lender benefits from knowing they have the customers business for a definite period of time.
Of course even in these fixed rate periods there were times that people would decide they wanted to move their loans for various reasons, and the lenders found they were missing out. They needed a way to put consumers off leaving and moving their loans, and that is what lead to the birth of the home loan exit fee.
Since their introduction, borrowers are more than welcome to leave their current lender and home loan, if they were prepared to pay the various exit fees and charges .
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Types Of Charges
There are a couple of different kinds of charges you will face if you leave your home loan during the early fixed period. The first is the standard exit fee. The figure that you will pay normally depends on the length of time you have had the loan. Borrowers are near to the end of their fixed period will generally pay less than borrowers who choose to leave within a year or two of taking on the loan.
The actually amount charged is generally worked out using a number of different methods depending on the lender. The most common methods are:
Fixed rate per year- Some lenders will charge you a fixed fee for each year left on your loan. For example if the charge was $1000 for each year left on the loan, and you had 3 years left of a 5 year loan you would have to pay $3000 to leave.
Percentage of original loan- With this method the charge you pay will be a percentage of the original amount borrowed. As the years on your contracted loan run down, so will the percentage you would have to pay to leave the deal. For example a percentage exit fee could look something like this:
- 10% of loan if you leave after 1 year
- 8% of loan if you leave after 2 years
- 6% if you leave after 3 years
- 5% if you leave after 4 years
- 4.5% if you leave after 5 years.
(This is merely an example so figures should not be taken literally.)
The next type of exit fee you may face is only applicable to those on a fixed rate deal. This charge is known as a Break Cost. This charge is not one you will always have to pay, and is dependant on the current interest rates elsewhere.
The last of the normal exit fees you will run into is commonly known as the rather ambiguous “Other Costs”. Lenders explain these fees as relating to costs that they incur in closing and moving your mortgage accounts. These fees can also be referred to as admin costs, or closing fees, and will normally be a set amount.
Why are they charged?
As mentioned, people now generally tend to spend less time in their homes, and less time with one lender. The exit fees have been put in place to discourage customers from jumping from lender to lender, and to make it less attractive for people to move their loan elsewhere.
Exit fees have long been a cause of argument and anger from consumers, and when you consider some of the reasons that people would want to leave their current loans it is easy to see why.
Why People Move
There are a number of reasons why you may decide to leave your current home loan provider, and some of the most common are outlined below:
A better rate- We live in a time where money is tighter than ever. Lenders are always creating new deals to entice new customers through the doors, and this means that you can quite often find better rates than you currently receive.
A small reduction in the interest rates you pay on your home loan can add up to a massive monthly saving. In fact, in many cases a change of even just a 1/2% drop in rate can save you $150-$200 a month depending on the size of your mortgage.
With the chance of making savings of that size, customer loyalty is a thing of the past as we all try and save money any way we can.
Having to sell- With the economy is the state it’s in some people end up in a position where they have to leave their homes whether they want to or not. In a situation where someone has lost their job, or fallen into some form of financial difficulty it can become necessary to sell the property to avoid falling into further financial trouble.
In this kind of situation it could be that the borrower does not want to break their home loan contract, but is left with no choice.
Moving up the ladder- For some growing families it may become necessary to move into a bigger property. Although you may have started off in a modest two bedroom apartment, if you suddenly find yourself with a couple for children you are going to need somewhere with a little more space.
As you can see these are all very different reasons for wanting to break the home loan contract. Unfortunately the result is the same in all of these situations. If the home loan is ended early an exit fee will have to be paid.
Can You Avoid Charges?
There are a couple of ways you can avoid exit charges, or at least limit the impact that they have on your finances. Let’s have a look at your options.
Plan ahead- Although there are things in life that we can’t plan for, it is a good idea to have some fort of plan of action before you take on a home loan. Try to figure out roughly how long you plan on being in the property before you move up the ladder. If you think you may want to move after 3 years, make sure you only fix for 3 years.
If you think you may have the chance to move within a year then make sure you don’t get tied in for a long term deal. This way you won’t have to pay anything in fees, and even if you do the amount charged should be much less.
Get a portable loan- Some mortgage products come with a portability feature. This means that if you decide to move home you can take the loan with you without breaking the contract. In other words your loan will now correspond to your new property and not your old one.
Make sure that you look at all the other terms and conditions of these deals, as whilst you may save money on exit fees you may find that you are spending out more in interest rates, or annual charges. The other thing you need to think about is the effect that property value may have on this type of deal. If property value suddenly falls and your property is worth less than you originally borrowed you will have to find the difference if you are to move your existing loan with you.
Portable home loans can come in very useful, especially for those who want the flexibility to move home without thinking about fees.
Stay put- As simplistic as it seems the easiest way to avoid paying exit fees is to remain with your current lender for the full term of the loan. If you do not need to move for any reason, and the rate you are receiving is fairly competitive there is little point in shelling out money that you don’t need to.
Wait until your loan term is almost up and then start scouring the market for better deals.
What The Banks Are Doing
As of late the relationship between the public and the banks has been rocky to say the least. With the pressure from consumers, and governments alike, banks are starting to rethink their whole pricing strategy when it comes to fees and exit charges.
Many heads of state around the globe have been calling on bank bosses to scrap the charges, and in fact one Australian bank ANZ has already taken the step or wiping exit fees from it’s business.
This has to be good news for consumers. As with any other trade, it is very hard to see other banks not following suit, as the competition for our business takes a new twist and turn.
Could this mean the end of exit fees altogether? If so will lenders come up with a new set of charges to regain the upper hand?
One thing is for certain, whilst home loan exit fees are still being charged, you should do everything you can to limit the amount you have to pay in the event you move home. Hopefully some of our tips will have helped you understand some of the ways you can minimise the impact of fees on your home loan.
Related Posts
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- Exit Fees & Break Fees
Sometimes when a person has a mortgage, they still get the urge to move from their home. The earlier they move - the more fees they have to pay. Here is a guide to possible fees that a person might be looking at if they decide to change their mortgage agreement. - Exit Fee War Erupts Between Banks
As the battle for home loan customers hots up a war of words seems to have broken out between the banks about exit fees. After some banks have wiped fees altogether, everyone is now watching with bated breath to see what other banks in the country are going to do in reply. - How to Avoid Home Loan Exit Fees
With careful mortgage planning you can avoid having to pay a termination fee or fixed interest rate break costs. Fees and charges are a part of the mortgage scene but with thoughtful structuring of your home loan you can effectively rule out having to pay any pay out fees. - Loan Portability Can Save on Refinance Exit Fees
If you are looking for a home loan then you should be sure that your home loan will allow you to to be as flexible as possible in the future. Read this article and find out about loan portability and how it can save you a lot of money. - Watch out for Hidden Early Exit Fees
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