Save on ongoing fees so you can pay off your loan quicker
Home loans with no ongoing fees can be a great option for cash-conscious home buyers, as they reduce the cost of your loan while sometimes also offering competitive rates and a host of features that enable you to have control over your loan repayments.
How does a home loan with no ongoing fees work?
Banks and other lenders in Australia are competing for your business by offering you better packaged loans with better features and more competitive rates.
Usually, many home loans in the Australian market will charge monthly fees to maintain your home loan account, or annual fees if you have a package home loan. Home loans with no ongoing fees waive these, meaning you pay your upfront start up costs such as application and valuation fees, and then don't have to worry about recurring monthly or annual fees. Over the course of your loan, this can save you thousands.
Having no ongoing fees on your mortgage can be a lot more significant than saving on a one-off payment such as an establishment fee, and it can lower the cost of a home purchase by a couple of thousand dollars.
Comparison of home loans with no ongoing fees
How much can you save with no ongoing fees?
Richard is deciding between two home loans. A no-frills home loan with no ongoing fees and a fully featured home loan with an offset account.
The no-frills home loan has an interest rate of 5.50% p.a. and the lender charges the standard upfront fees, totalling $400.
The fully featured home loan has a range of upfront fee discounts and an interest rate of 5.50% p.a., but charges a $300 annual fee.
Richard wants to know which loan is going to save him more in the long run.
|No-frills home loan||Fully featured home loan|
|Interest rate||5.50% p.a.||5.50% p.a.|
|Loan term||20 years||20 years|
|Set up fees||$400||$0|
|Ongoing fees (p.a.)||$0||$300|
|Total cost of fees||$400||$6,000|
|Total interest payable||$325,465||$325,465|
|Total cost of loan with fees||$825,865||$831,465|
In the end, it seems like the no-frills home loan would be cheaper in the long run.
How to compare home loans with no ongoing fees
- Waived fees. Find out what ongoing fees you're not going to be charged. In many cases a home loan might waive monthly or annual fees, but still charge fees for offset or redraw facilities, which might add a considerable cost to your loan. Also compare other loans to ensure that paying lower upfront fees won't offer you a bigger saving than waived ongoing fees.
- Interest rates. Be mindful that the lender could be making up for the lack of fees with a higher interest rate. Compare the interest against the comparison rate to see if the fees make a difference. The comparison rate is a useful yardstick, as it merges the interest rate with some of the fees you'll pay over a certain period of time, usually 25 years.
- Additional features. The fact that a home loan has no ongoing fees should not be enough to make you go for it. Consider other features that come with the loan that could make repayment easier or access to additional funds possible. If you get a home loan with an offset account, you could end up saving more on interest rates, while a loan that allows for additional repayments could help you get out of your loan sooner and give you access to these payments through a redraw facility.
- Repayment options. A loan with flexible repayment options could help reduce the strain of paying it off, allowing you to repay when your salary is paid. As mentioned, a home loan with an option to make additional repayments at any time can also be helpful if you predict an increase in your income in the future.
Pros and cons
- No ongoing fees. This is the main advantage of this type of mortgage. Such loans are becoming increasingly popular in Australia, as lenders compete for mortgage business. The loans offer you no ongoing monthly administrative fees, no exit fees and no annual fees, making it more affordable to own a home and repay the mortgage.
- Could work out to be cheaper. One of the main benefits of having no fees is that you can save the money to put towards your home loan. This pays off your principal faster, and could reduce interest payments.
- Higher interest rates. Home loans with no ongoing fees could have higher interest rates than other standard mortgages, to make up for the lack of fees, although this is not a hard and fast rule.
- No features. Another reason that lenders could waive a range of fees is that the cost of maintaining the loan is cheaper for them. This usually means that the loan is a no-frills one and you could be missing out on features like an offset account.
Things to consider about home loans with no ongoing fees
There is more to a home loan than just the ongoing fees you pay. When choosing a loan with no ongoing fees, be sure to look at the extra features you get such as an offset account or the option to make additional repayments. If you can foresee in the future that you’ll be making additional repayments, this is something you’ll need to consider before committing in a loan.
While fees are important, they aren't the only indicator of a home loan's value. Put in a large amount of effort into choosing an interest rate type, such as a variable, fixed or split rate, and also ensure that the home loan will suit you. Take into account cash backs and other incentives, such as home loans which offer Qantas Points earning. Finally, know too that if you prefer to keep all of your banking accounts with the one lender, a package home loan can also sometimes give you large savings and features.
Frequently asked questions
Are there any exit fees on such loans?
New laws in Australia have banished any exit fees on all home loans applied for from July 1, 2011. However, you may have to pay exit fees if you refinance a mortgage that was applied for before this deadline.
What fees will I have to pay on such a loan?
Even though these home loans don't charge monthly or annual fees, they might still charge up front fees such as establishment/application fees, valuation fees, legal fees and settlement fees.