Exit Fee Shake Up
by Nick Carydias, Senior Mortgage & Finance Adviser
Exit Fees
When entering into any form on contract, the term “exit fee” has long been feared by many. Whether it’s a home loan, mobile phone contract, or a car lease; exit fees are generally a costly process for everyone, and one we try to avoid at one time or another.
Unfortunately, exit fees have been an accepted and common practise in the banking and finance world for years; that is, until now.
As you have probably seen in the media over the last six months, there has been a strong backlash against these types of fees, with the public and others putting pressure on financial institutions to abolish these fees once and for all. By abolishing exit fees, this would create much more flexibility and choice for the consumer; an incentive worth pushing for.
Since this surge in public interest, a lot of the big banks (and also some smaller banks) have succumbed to the pressure and made significant changes to their fee models. In addition, there is also fierce competition for mortgage lenders to ‘pinch’ other lenders’ business, by way of cash back incentives for clients who refinance their loans.
What’s a typical exit fee?
The typical exit fee from a major bank (pre recent changes) was about $700 for a client who wanted to payout/discharge their loan within the first 4 years of establishing it. The really painful exit costs came from (and still do come from) smaller lenders and non-conforming lenders (lenders that assist people who are credit impaired). Some of the smaller lenders were charging a percentage of the loan based on when you exited the loan (eg: 2% in the first 2 years, 1% in year 3 or 4 – so for a loan of $400,000, if you were to exit in the first 2 years, you were going to part with a whopping $8,000 in exit costs).
The recent changes have seen a lot of the major banks abolish their exit costs; however it’s important to note some of the non-conforming lenders and smaller lenders are still implementing most of their fees.
What about fixed rate loans?
Exit fees for fixed rate loans are a different kettle of fish. These fees will remain, regardless of the lender and you need to be mindful when deciding whether to opt for a ‘fixed’ loan or not. Some of the largest exit costs we have come across (some as large as $30,000) have been from people wanting to break a fixed loan early. When you fix your loan, you are agreeing to pay a set interest rate for a set amount of time – therefore if you break that agreement early, the bank will calculate what its losses would be (in interest) for that remaining amount of time that you won’t fulfill, and charge you without hesitation. Even if you break a fixed rate loan, and the variable loan you are moving to is higher than your current fixed rate, you may still pay these fees.
What does this mean for you?
So what does this all mean to you as a consumer? In a lot of cases, since the changes, it means you will essentially save money if you want to change your existing loans. The bigger picture is that it should create a more competitive home loan market, as consumers are no longer “stuck” with their bank and can at any point jump ship if a better opportunity comes along.
Banks have, for a long time, relied on their clients being loyal, and benefited from their clients having more than one loan/account through their institution. With multiple loans/accounts and exits fees in place, it was difficult in the past for client to change banks. Now, however, if there is a home loan product that can save you $2,000 - $3,000 a year in interest, and the other lender is offering you the same product suite as your current one, then the choice is easy.
Reviewing your loans
It’s important to review your current position and loans every 12 months, regardless of exit fee changes. It’s money in your pocket at the end of the day, so its’ definitely worth your while if it means saving you hundreds, or often thousands, of dollars per year.
For assistance in reviewing your mortgage, or for more information on exit fees and specific lender details, please call our Client Liaison Officer on 1300 726 082 who can book you an appointment with a John Hopkins Mortgage & Finance Adviser.
To arrange an appointment with a John Hopkins Mortgage & Finance Adviser, please contact our Client Liaison Officer on 1300 726 082 or click here.