If you've ever read through a loan offer or mortgage document in detail (well, at least glanced through one!) then you've no doubt come across a whole range of fees and charges associated with the loan.
And if you're like most people, you've probably wondered what the heck most of them are for.
So let's dive into the fascinating world of lending, and learn some of the lingo around what those pesky fees are. I'm not saying you'll be able to do anything other than pay them, mind you, but at least you'll know why you're paying them!
Line Fees
I'll start with this one, as it's one of the more confusing fees! Basically, a line fee is charged on the full amount of your loan in order to "reserve" the money for you.
Generally it's in the range of 1%-2%. It's the bank saying "hey, you haven't actually drawn down the loan yet, but we've popped that amount in a jar on the mantelpiece in preparation, so you need to pay us something for keeping it aside waiting for you".
Once you start to draw the loan down, you start paying interest on the money drawn.
Given that lenders generally have caps on how much they can lend out each month or quarter, there is some logic behind it. Essentially, once the money is earmarked for your project, that takes up some of their lending capacity, but they're not actually earning any interest on it until you start to draw down the loan.
In the meantime, they can't lend that amount to anybody else and get interest from them. So they're protecting themselves from being in a position where they've committed a whole lot of funds to loans, without getting paid for them.
Line fees can vary significantly among lenders and loan products, so it's advisable to compare offers from different financial institutions and find the best terms to suit your needs.
Application Fee
This fee is charged by the lender for processing your mortgage application. It covers administrative costs and credit checks. It's what you pay to get the lender to look at your loan application.
Valuation Fee
Before approving a mortgage, lenders usually require a valuation of the property to assess its worth. The valuation fee covers the cost of the professional valuer who evaluates the property.
Depending on the nature of the property you're buying, this can range from a few hundred dollars up to tens of thousands. Most likely it's going to be at least a couple of thousand dollars.
Loan Establishment / Success / Origination Fee
As the name suggests, this fee is charged by the lender to cover administrative and legal costs associated with creating the loan. That huge pile of paperwork to read and sign doesn't come cheap!
But Wait, There's More!
The fees I've talked about so far are common to almost every mortgage. You probably won't be surprised, though, to find out there are lots more that might possibly show up in your loan documents. Let's take a quick walk down that particular rabbit hole so you can keep an eye out for these in your documentation.
Annual Fee: Some lenders charge an annual fee for maintaining the line of credit. This fee is typically assessed regardless of whether you use the line or not.
Maintenance Fee: A close relative of the annual fee, a maintenance fee may be charged periodically (e.g., monthly or quarterly) to cover the ongoing management and servicing of the line of credit.
Draw Fees: These fees apply when you actually use the line of credit and make a withdrawal. The lender may charge a fixed fee or a percentage of the amount withdrawn each time you access the funds.
Mortgage Discharge Fee: If you pay off your mortgage or switch to a different lender before the term ends, you may be charged a mortgage discharge fee by your existing lender. This fee covers the administrative costs of finalising the loan.
Mortgage Insurance: If you have a deposit less than 20% of the property's value, you may be required to pay lenders mortgage insurance (LMI). This insurance protects the lender in case you default on your loan. The cost of LMI varies based on the loan amount and the loan-to-value ratio (LVR). Let me repeat that so you're clear - it protects the LENDER, not you. But you're the one who pays for it.
And Still More...
Remember too, there are also costs associated with purchasing a property. They're not fees to do with your loan, and I have covered them in more detail in this article.
Still, it's worth mentioning them again to make sure you're fully prepared for the cost of purchasing a property. Depending on circumstances, a lender may even lend you the funds for some of these costs, so it's worth knowing about them in case you can negotiate extra funds as a result.
Stamp Duty: This is a state or territory government tax imposed on property transactions. The amount of stamp duty varies depending on the property's value, location, and other factors. It's a significant cost to consider when purchasing a property. This is one cost you have some chance of adding to a loan, particularly with commercial finance.
Legal and Conveyancing Fees: You will need a solicitor or conveyancer to handle the legal aspects of your property purchase and mortgage. Their services include things such as reviewing contracts, conducting searches, and handling the settlement process.
Title Search and Registration Fees: These fees cover the cost of conducting a title search to ensure the property has a clear title and registering the mortgage on the property's title. Usually they're charged as extras to your legal person's base rate for handling your transaction.
Dizzy yet? Buying a property certainly doesn't come cheap, and that's even without adding in the cost of the property itself.
To finish up, it's important to note that the specific fees and their amounts can vary among lenders and depend on factors such as the loan amount, property value, and location. It's advisable to consult with mortgage brokers or lenders directly to get a detailed breakdown of the fees associated with a specific mortgage product.
And if you're like most people, you've probably wondered what the heck most of them are for.
So let's dive into the fascinating world of lending, and learn some of the lingo around what those pesky fees are. I'm not saying you'll be able to do anything other than pay them, mind you, but at least you'll know why you're paying them!
Line FeesI'll start with this one, as it's one of the more confusing fees! Basically, a line fee is charged on the full amount of your loan in order to "reserve" the money for you.
Generally it's in the range of 1%-2%. It's the bank saying "hey, you haven't actually drawn down the loan yet, but we've popped that amount in a jar on the mantelpiece in preparation, so you need to pay us something for keeping it aside waiting for you".
Once you start to draw the loan down, you start paying interest on the money drawn.
Given that lenders generally have caps on how much they can lend out each month or quarter, there is some logic behind it. Essentially, once the money is earmarked for your project, that takes up some of their lending capacity, but they're not actually earning any interest on it until you start to draw down the loan.
In the meantime, they can't lend that amount to anybody else and get interest from them. So they're protecting themselves from being in a position where they've committed a whole lot of funds to loans, without getting paid for them.
Line fees can vary significantly among lenders and loan products, so it's advisable to compare offers from different financial institutions and find the best terms to suit your needs.
Application Fee
This fee is charged by the lender for processing your mortgage application. It covers administrative costs and credit checks. It's what you pay to get the lender to look at your loan application.
Valuation Fee
Before approving a mortgage, lenders usually require a valuation of the property to assess its worth. The valuation fee covers the cost of the professional valuer who evaluates the property.
Depending on the nature of the property you're buying, this can range from a few hundred dollars up to tens of thousands. Most likely it's going to be at least a couple of thousand dollars.
Loan Establishment / Success / Origination Fee
As the name suggests, this fee is charged by the lender to cover administrative and legal costs associated with creating the loan. That huge pile of paperwork to read and sign doesn't come cheap!
But Wait, There's More!
The fees I've talked about so far are common to almost every mortgage. You probably won't be surprised, though, to find out there are lots more that might possibly show up in your loan documents. Let's take a quick walk down that particular rabbit hole so you can keep an eye out for these in your documentation.
Annual Fee: Some lenders charge an annual fee for maintaining the line of credit. This fee is typically assessed regardless of whether you use the line or not.
Maintenance Fee: A close relative of the annual fee, a maintenance fee may be charged periodically (e.g., monthly or quarterly) to cover the ongoing management and servicing of the line of credit.
Draw Fees: These fees apply when you actually use the line of credit and make a withdrawal. The lender may charge a fixed fee or a percentage of the amount withdrawn each time you access the funds.
Mortgage Discharge Fee: If you pay off your mortgage or switch to a different lender before the term ends, you may be charged a mortgage discharge fee by your existing lender. This fee covers the administrative costs of finalising the loan.
Mortgage Insurance: If you have a deposit less than 20% of the property's value, you may be required to pay lenders mortgage insurance (LMI). This insurance protects the lender in case you default on your loan. The cost of LMI varies based on the loan amount and the loan-to-value ratio (LVR). Let me repeat that so you're clear - it protects the LENDER, not you. But you're the one who pays for it.
And Still More...Remember too, there are also costs associated with purchasing a property. They're not fees to do with your loan, and I have covered them in more detail in this article.
Still, it's worth mentioning them again to make sure you're fully prepared for the cost of purchasing a property. Depending on circumstances, a lender may even lend you the funds for some of these costs, so it's worth knowing about them in case you can negotiate extra funds as a result.
Stamp Duty: This is a state or territory government tax imposed on property transactions. The amount of stamp duty varies depending on the property's value, location, and other factors. It's a significant cost to consider when purchasing a property. This is one cost you have some chance of adding to a loan, particularly with commercial finance.
Legal and Conveyancing Fees: You will need a solicitor or conveyancer to handle the legal aspects of your property purchase and mortgage. Their services include things such as reviewing contracts, conducting searches, and handling the settlement process.
Title Search and Registration Fees: These fees cover the cost of conducting a title search to ensure the property has a clear title and registering the mortgage on the property's title. Usually they're charged as extras to your legal person's base rate for handling your transaction.
Dizzy yet? Buying a property certainly doesn't come cheap, and that's even without adding in the cost of the property itself.
To finish up, it's important to note that the specific fees and their amounts can vary among lenders and depend on factors such as the loan amount, property value, and location. It's advisable to consult with mortgage brokers or lenders directly to get a detailed breakdown of the fees associated with a specific mortgage product.
