Exit fees squeeze loan churners

SHELLING out thousands of dollars in exit fees for refinancing your home loan can be avoided if you do your homework before signing on the dotted line.

Property signs /Reuters

Exit fees squeeze loan churners

EARLY exit fees on home loans can cost you thousands of dollars, but they can be avoided.

Before taking out a loan, people should get advice on what fees would apply in particular circumstances, and have a clear understanding of their short-term goals, senior banking officials said.

InfoChoice general manager Denis Orrock said deferred establishment fees, early exit fees and break costs on loans could "run into thousands'' of dollars.

"The massive increase in loan churning and the resulting fall in the average life of a mortgage has seen new emphasis placed by lenders on fees for leaving a loan after the first few years,'' he said.

"Especially watch out for these new fees on loans that offer low or no upfront fees when you take them out.''

Mr Orrock said exit fees could be a flat fee or a percentage of the amount of the loan outstanding at the time.

"These fees are not incorporated in lenders' comparison rate calculations, one of the reasons there is an increasing incidence of these charges,'' he said.

BankSA general manager Chris Ward said exit fees, or early repayment fees, were generally payable on loans with a honeymoon period, which had a discount factored into the interest rate in the first year.

He said on this type of loan the financial institution would expect "continuity of customer'' for a period of time - three to four years perhaps - to ensure the bank's earning capacity on the loan.

Mr Ward said the fees could be significant, and depended on how long the loan had been in place and how long it still had to run.

Australian Central senior manager retail banking Wendy Spurling said break costs were charged when a fixed rate loan was paid off early.

"For example, if you take out a five-year fixed rate loan and refinance in two years, under the contract there would be a penalty involved because you've broken the contract,'' she said.

Ms Spurling said the best way to avoid these costs was to consider them all before taking out the loan product.

"Get some advice on making sure you've got a loan that suits your needs, don't just look at the cheapest price - what are your longer term goals and how long do you intend to stay in this property?'' she said.

"Be aware of what the penalty could be and all those fees should be disclosed in your contract.

"So make sure when you receive your contract you fully understand what those penalties are.''

Mr Ward said it all came down to asking the right questions before signing any contracts.

"Make sure you're asking questions,'' he said.

"When you're borrowing money, ensure that you ask lots of questions and ensure that you have your own objectives clear in your mind.''