Watch out for bank fees

We all know that banks are not charitable organisations. They exist to make money. And they make a lot of money through charging fees to customers. Billions of dollars in fact. There has been a lot of negative publicity of late about the extent of these fees resulting in a rethink of how and when fees are levied.

But bank fees are with us and they can add up, particularly when we’re talking about home loans. Interest cost is by far the biggest cost of a home loan and not surprisingly a low rate is something we look for. But a low rate can sometimes come at a cost. This cost could be a reduction in product features or the imposition  of a range of fees and charges to  make up for the banks’ lost interest income. In fact, these fees and charges can be significant, adding up to thousands, if not tens of thousands of dollars.
There are lots of different types of home loan fees. These include:

1. Up front fees – like application and loan processing fees
2. Ongoing fees – monthly account fees
3. Default fees – fees levied if you fail to meet your home loan obligations e.g. if you miss a payment
4. Termination fees – a penalty levied for paying off your loan early. This is typically charged where you take out a fixed rate loan and decide to pay it off before the end of the fixed rate term – this fee can be substantial (many thousands of dollars) and often comes as a shock to borrowers
5. Settlement fee – a fee charged to close out your loan
6. Other fees – this could include fees for making a draw-down, extending your loan or requesting a duplicate statement

So before you sign on the dotted line there are two things you should do:

1. Check and compare the Comparison Rate between products and lenders which will give you a good indication of the relative cost of the loan(s). But note that the Comparison rate only takes into account certain costs ascertainable at the time the loan was taken out, and not costs that are dependent on a future event. See my Yahoo7 Finance column Comparing home loans using Comparison Rates for a run down on how to use Comparison rates.
2. Get your lender to set out and explain all the costs associated with the loan. Run some ‘what if ‘ scenarios like what would happen if you wanted to pay your loan off early, or if you wanted to borrower more money, or if you wanted to make extra or lump sum payments, or if you got into financial difficulty. Your lender should be able to supply you with  a list of all their fees and charges.

The key to all this is to make sure you are fully aware of all the fees associated with your loan, including how much they’ll be and when they’ll be charged.
My tip:
Don’t judge a home loan on interest rate alone. Always insist on a run down of any fees that may be charged and use the Comparison Rate as a starting point to determine a loan’s true cost.