Beware Those Hidden Fees!

With interest rates attracting so much glare from the political and media spotlights, it's hardly surprising that our thoughts tend to focus on that all-important percentage figure when we start planning our mortgage or remortgage.

But in truth, the rate at which we repay our borrowings is only one number in a matrix of fees and establishment costs which can have a huge impact on what we actually end up paying.

For sure, the comparison rate - or annualised average percentage rate (AAPR) is an 'effective interest rate' that takes into account several ancillary charges, and makes comparison of loans easier.
But other fees like hidden fees need to be studied just as carefully. Here's a quick round-up of some common ones.

Application fees: lenders may charge an upfront establishment fee and application fee.
Valuation fees: lenders may also charge for a valuation of the property. If you're worried that you might struggle to meet a lender's income requirements for the loan, ask them to check first before you go ahead with the valuation. Bear in mind that you'll have to pay for it even if you don't get the loan.

Exit penalties: When you're exploring your loan options you should always look carefully at what the costs would be if you wanted to pay it off early. Many loans have no payout penalties, but if they exist they can be steep, particularly in the early years.

Also bear in mind that fixed-interest loans can have particularly high exit penalties if the current variable interest rate is lower than the rate you're paying. If you want to get out of the mortgage, you may have to make up all the 'lost' interest the bank would have made from your paying the higher rate through to the end of the fixed term. This is called the 'break cost'. For example, if you had two years to run on a fixed period for a $100,000 loan at 9% and the current variable rate was 7.5%, the exit fee could be up to $3000.

Lender's mortgage insurance: depending on how much you borrow, you may be required to take out lender's mortgage insurance. It's a way for the lender to protect itself in case you default on your repayments. It's important to note that lender's mortgage insurance isn't for you, it's for the lender. If you don't make your mortgage repayments and the insurance kicks in, you'll still be liable for the payments and interest you've missed. This insurance can be expensive.