There has been a bit of coverage on exit fees in the media lately, but most people don't really know what they are. If you are one of those people then this is the post for you….
Most people wouldn't know that there are a few different types of exit fees and they can vary depending on whether you have a fixed or a variable rate loan. Let me explain this in a bit more detail…
Discharge of mortgage fee
This fee is payable when you ‘payout' your loan, regardless of when this occurs. It simply covers the cost for the lender to locate the title and hand it over to you or your representative and carry out any administrative processes to close the home loan down. This generally costs around $350 and is charged by the lender.
In addition to this, each state and territory has a separate fee to either register a new mortgage or discharge an existing one. So upon discharge of the mortgage, the relevant state or territory will charge a fee to update their records.
Early exit fees
There are two ‘early exit' fees you should be aware of. These are:
- Deferred Establishment Fee (DEF) sometimes also called an Early Repayment Fee (ERF)
- Fixed Rate Break Costs
Deferred Establishment Fee/ Early Repayment Fees
A DEF is usually payable if you discharge your loan within the first four years. These days, most banks generally charge a flat figure, however, in the past it was often calculated as a percentage of your loan balance.
The flat fee usually ranges on average from $700-$1,000 if you choose to pay out your mortgage in the first four years
Credit unions and building societies on the other hand generally have a tiered approach to the DEF.
For example, if you choose to discharge your home loan within the first year, they might charge $1,500. In the second year it could go down to $1,200 and in the third year it could come down to $900 and for the fourth year it might be $600.
As a general rule there is no DEF after year four. However, older home loans may well have a DEF that extends beyond four years.
In some cases these fees may be payable even where the loan is not repaid in full for example the fee may be triggered if the loan balance drops below a certain percentage of the original approval amount.
Fixed Rate Break Costs
You can generally expect break costs to be payable if you exit a fixed rate loan before the expiration of the fixed rate term. This fee can be quite significant depending on the state of interest rates at the time you choose to exit the loan.
Normally you can expect the fee to be substantial if prevailing interest rates have fallen below the rate at which you fixed your loan. However, if interest rates have risen since you fixed your loan, you can expect the fee to be smaller. You can also expect the fee to be smaller the closer you are to the expiration of the fixed rate period.
Fixed Rate Break Costs may be payable in addition to the DEF or ERF and are normally applied from the start of the fixing of the loan period, not from the start of the loan.
If you are looking to pay out your home loan before the end of its term, then the best thing to do is to:
- Contact your lender
- Ask for a discharge payout figure
- Ask your lender to put it in writing and break it down for you eg. Fees, principal amount, accrued interest, discharge figure and how much it all adds up to.
- Be aware that Break Costs are generally only valid for the day they are provided.
Then contact your mortgage broker to help you decipher the lenders response and to assist in making an informed decision as to your next course of action.
I hope this information has shone some light on exit fees, what they are and how they may apply to you. If you have anything you would like to add then leave me a comment below or you can always contact me on my website.