Beware Exit Fees When Refinancing.

Saturday, January 02, 2010

Home loan refinancing continues to be an increasingly popular strategy for home-owners for a myriad of reasons.

It may be to consolidate debt, access a lower interest rate and/or better deal from their existing or another lender, or to access equity to fund the purchase of other investments.

As a result, it is estimated that 30-40% of home loan applications are people looking to refinance.

However, Smartline Personal Mortgage Advisers has warned those considering refinancing to fully consider the exit costs associated with changing loan or lender.

Smartline Managing Director, Chris Acret, said home loan exit fees had been introduced by the major lenders over the past few years, primarily as a strategy to discourage people from refinancing.

Exit fees are often referred to as ‘early termination fees', which is the cost of closing the loan. Different banks use different terminology and early termination fees can also be known as deferred administration fees, deferred establishment fees or early repayment fees.

You may also be charged ‘other fees' which can include a discharge fee, administration fee and any other associated fees.

"If you look back five years or more ago, banks rarely charged exit fees," Mr Acret said. "Now, there's very few lenders who do not charge them." "It's really about forcing the customer to stay with them for as long as possible." "A home loan doesn't really make much profit for a bank for the first two years; those first couple of years are just ‘break even'." "With the average loan term now about three-and-a-half years, banks only have a window of about one-and-a-half years to make a profit from that loan." While many people are aware there can be significant costs if you refinance a fixed rate home loan, they are surprised by the costs they may face to refinance from a variable rate loan.

As with many aspects of home loans these days, there is quite a disparity in exit fees. Some lenders, generally larger banks, charge a flat fee of $750 to $1000 while others, generally non-bank lenders, may charge in the order of 2-2.5% of the loan balance. On the average $300,000 loan, this could mean a charge of more than $6000.

Mr Acret said that while exit fees are one factor that you should take in to account when selecting a lender and product, the level of importance placed on the exit fee will vary depending on your future plans.

"Exit fees generally apply in the first five years of the loan, so think about your plans for the property and expected time frames," Mr Acret said.

"If there is a real chance you may look to exit out of the loan within a few years as a result of either selling or refinancing, it may be worth considering the issue of exit fees a little more." "Home loans with a slightly higher interest rate often have lower or no exit fees, so may actually end up being a cheaper option if you are looking to repay early." "Working with an experienced mortgage adviser will help you to make some informed decisions about the best way to manage your home loan and associated fees."

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