21st Feb 2012

Exit fees explained

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One hurdle to switching loan providers is the exit fees financial institutions charge to allow you to break your agreement. While there is much media coverage about such fees, do you really know what they are?

When you take out a new loan product there are initial costs involved. These costs can include an establishment fee, valuation fee and legal costs and, on many occasions, are waived by your financial institution as an incentive to get your business. However, should you choose to exit your contract before the pre-agreed period, then you may find yourself slugged by an early exit fee, which can be a considerable amount of money.

Legislation implemented by the Federal Government last year has banned the charging of exit fees for all new loans taken out after 1 July 2011. If your loan was taken out before this date and you are now looking to switch lenders, chances are you will have some kind of exit fee attached to your agreement.

And the bad news doesn’t stop there. If you have a fixed rate agreement on your loan, then you may also be liable to pay a break fee. The method for calculating what break fees will be charged is complicated, but it takes into consideration:

  • the initial amount borrowed
  • the duration of the discount period
  • the rate you have locked in compared to the current interest rate

Break fees are different to exit fees and can still be charged by lenders for loans signed after 1 July 2011.

So, before you jump to move your money to another lender, be sure to ask your current lender for a breakdown of exactly what costs are involved, should you decide to end your agreement early.

Would an early exit fee or break fee stop you from switching lenders?





COMMENTS

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gerberry1
21st Feb 2012
4:18pm
Exit fees are on new loans taken out July 2011, who'd want to change banks at this stage, what about those who have been good bank customers for years, seemingly the Government left us out - again - I think in the long run if you have a loan before July 2011 to stick with who you are with, rates go up and down, and I agree with the article in the Sunday Telegraph on 19/2 who suggested if you cant handle rate increases the take out a Fixed Loan.
When calculating if you can afford a loan or not, make sure you can afford the loan at 10% and if you cant, then be careful. Also once the fortnightly rate is worked out at 10% put that amount on your loan fortnightly. It gives you an insurance, if things gets tight and most bank loans offer redraw, so if you need ready money, it's there for you.
Betty
Nan Norma
21st Feb 2012
5:13pm
I saw all this coming. People were encourged to take out loans when the the interest was low, without any thought to what happens when the rate goes up. I remember when the general interest rate was 13% .
Bluebell
21st Feb 2012
5:55pm
In 1983, if you had a resonable amount of cash to invest in a Term Deposit you got 18%. At the same time a blood relative of mine had a housing loan at 22%. Their house-3 bedrooms and a small games room under main roof (no ensuite) with single width open carport (no side walls or door) in the outer suburbs was about $30,000.00. Imagine if rates were that high on the average home now.


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