When you think about the costs of a mortgage and associated fees you naturally focus on the monthly payments. However, there are also wide variety of additional fees you need to consider:
1. Application fees
For many mortgage deals a mortgage lender will charge an application fee. This can be as low as $200 and as high as $600. Whilst this is a fee for dealing with your application, it can also be a way of mortgage lenders manipulating their headline rate. By recouping some money with a higher application fee, a mortgage lender can afford to offer you a lower interest rate and get press coverage in offering one of the lowest rate home loans.
2. Valuation fees and surveys
Mortgage lenders want to be sure that you’re not overpaying for your home and that the price you’re paying is a fair one. If you overpay and then can’t meet your mortgage payments, they’re at risk of being left with a shortfall. So you will have to pay a few hundred dollars for a valuation. This increases for larger/more expensive properties, since the valuer has a larger property to look at and larger potential liability should they be wrong.
You may also want to pay for a more in depth survey to get some additional assurance on the structure of the property. You can either go for a basic survey, or a more in depth Homebuyers Report or full structural survey.
3. Solicitors’/Conveyancing fees
The legal work associated with your mortgage is known as conveyancing. Historically, solicitors were used for the conveyancing work in completing home loans. However, licensed conveyancers are able to complete your legal work at a fraction of the cost. Legal bills cost upwards of $500.
4. Lenders Mortgage Insurance (LMI)
You have to pay for LMI if you’re putting down a relatively small deposit of 20% or less. Costs vary and the percentage charged increases based on the amount of deposit you put down and the size of your home loan. It’s an insurance policy to protect your lender should you fail to keep up repayments and your home be re-possessed and sells for less than the mortgage. Yes, mortgage lenders expect you to pay for their insurance! And no, you have no choice, if you want a mortgage with them, you have to pay for their insurance. This can cost anywhere from a few hundred dollars to a few thousand dollars so it’s important to check what the final costs are. In some instances, you may find that by finding a couple of thousand dollars for a larger deposit, you can save close to that amount in LMI.
5. Exit/Deed Release fees
In an effort to stop people from remortgaging and cover their admin costs in you doing so, many mortgage lenders charge exit fees. These typically apply if you close your home loan before the end of your term, ie if you move to another lender or remortgage within your 25/30 year period. Lenders can charge as much as $300-$500.
6. Early Repayment Charges (ERCs)
Once a mortgage lender has secured your custom, they typically lock you in beyond the term of whatever special deal they’ve used to entice you through the door in the first place. For example, if you could get a reduced rate of interest for the first three years, you are likely to find you’re locked in for a further two years on their Standard Variable Rate. Normally these fees are stated as a percentage of your original mortgage amount, often reducing proportionately until the end of the tie in period. Think of it this way, many lender enticements and honeymoon rates are loss leaders, hoping that you will stay with them for the next 25/30 years. The Early Repayment Charge is their way of ensuring you stay with them for at least the first X years (typically 5 years) so they get their pound of flesh in return. It’s not all bad, if you had just opted for their Standard Variable Rate from day one, you would have been paying over the odds anyway, so why not get a bonus in exchange for your loyalty.
Mortgages offering a cashback usually reserve the right to claim all or part of this money back if you switch within a certain timescale, so you may find your ERC is considerably higher.
7. Home and contents insurance
Lenders get big commissions from their chosen insurance company and you will very likely be paying over the odds if you go for a home and contents insurance through your mortgage lender, bank or on the high street. It’s far better, and usually much cheaper, to go for home and contents insurance elsewhere or better still an insurance broker.
8. Life assurance
Life, Trauma, Disability and Income Protection Insurance should be considered essential to protect you and your family in the event that things go wrong and should be an important part of protecting your mortgage. This is an additional cost that you should factor into your calculations. Again, you’ll find getting life based insurances elsewhere from your mortgage lender or bank will usually save you money.
10. Stamp duty
Stamp duty is payable to the state/territory you buy a house in when you buy a house, is usually the biggest cost of all and totally unavoidable. This varies from State to State working on a sliding scale. All mortgage lenders and brokers will have tools to help you calculate this. This is typically 2%-5.5.%, larger properties being charged a higher percentage. Ask your mortgage broker to give you an idea of what your stamp duty is likely to be.