Exit fees explained

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?