Common Loan Fees and How to Avoid Them
When taking out a loan in New Zealand, it’s essential to be aware of the various fees that can add to the overall cost of borrowing. Understanding these fees and knowing how to avoid or minimise them can save you a significant amount of money. This article explores common loan fees and offers practical advice on how to avoid them.
1. Application Fees
Application fees, also known as establishment fees, are charged by lenders to cover the cost of processing your loan application. These fees can vary widely depending on the lender and the type of loan.
How to Avoid It:
- Negotiate: Some lenders may be willing to waive the application fee, especially if you have a good credit history or are borrowing a large amount. It’s worth negotiating this fee before agreeing to the loan terms.
- Shop Around: Compare different lenders to find those with lower or no application fees. Websites like Credit Simple provide a comprehensive list of common home loan fees and can help you compare options.
2. Valuation Fees
A valuation fee is charged to cover the cost of having a professional valuer assess the property’s market value. This is often required for home loans to ensure the property is worth the amount being borrowed.
How to Avoid It:
- Check Inclusions: Some lenders include the valuation fee in the application fee or offer a free valuation as part of their loan package. Always check what is included in the application fee.
- Negotiate: If the valuation fee is not included, ask the lender if they can cover this cost as part of the loan package.
3. Monthly and Annual Service Fees
Monthly service fees or annual fees are ongoing charges that cover the administration of your loan account. These fees can add up over the life of the loan.
How to Avoid It:
- Choose the Right Loan Product: Some loan products, particularly basic or no-frills loans, do not charge monthly or annual service fees. Compare different loan products to find one that suits your needs without these ongoing fees.
- Package Deals: Some lenders offer package deals where the service fees are waived if you bundle other financial products, such as a credit card or transaction account, with your home loan.
4. Fixed Rate Break Costs
If you have a fixed-rate loan and decide to repay it early or switch to a different loan, you may incur fixed rate break costs. These fees compensate the lender for the loss of interest they would have earned.
How to Avoid It:
- Understand Terms: Before committing to a fixed-rate loan, understand the terms and conditions, including the potential break costs. The Kiwibank website provides detailed information on how these costs are calculated.
- Plan Ahead: If you think you might need to repay the loan early or switch to a different loan, consider opting for a variable rate loan, which typically does not have break costs.
5. Early Repayment Fees
Early repayment fees are charged when you pay off your loan ahead of schedule. These fees are more common with fixed-rate loans but can also apply to some variable-rate loans.
How to Avoid It:
- Choose the Right Loan: Opt for a loan that does not charge early repayment fees. Many variable-rate loans do not have these fees.
- Negotiate: If you anticipate paying off your loan early, negotiate with the lender to waive the early repayment fee before finalising the loan agreement.
6. Default Fees and Late Payment Penalties
Default fees and late payment penalties are charged when you miss a loan repayment. These fees can quickly add up and increase your overall debt.
How to Avoid It:
- Set Up Automatic Payments: Arrange for automatic payments from your bank account to ensure you never miss a repayment.
- Communicate with Your Lender: If you are experiencing financial difficulties, contact your lender as soon as possible. They may be able to offer a repayment plan or temporary relief from fees.
7. Redraw Fees
Redraw fees apply when you withdraw extra repayments you have made on your loan. This feature is common in home loans with a redraw facility.
How to Avoid It:
- Understand the Terms: Before making extra repayments, understand the terms of the redraw facility, including any fees.
- Choose a Loan with No Redraw Fees: Some loans offer free redraw facilities. Compare different loan products to find one that suits your needs.
8. Lenders Mortgage Insurance (LMI)
Lenders Mortgage Insurance (LMI) is required if you are borrowing more than 80% of the property’s value. This insurance protects the lender in case you default on the loan.
How to Avoid It:
- Save a Larger Deposit: Aim to save at least 20% of the property’s value to avoid LMI.
- Negotiate: In some cases, lenders may be willing to waive or reduce the LMI if you have a strong financial profile.
9. Discharge Fees
Discharge fees are charged when you fully repay your loan and the lender removes the mortgage from the property’s title.
How to Avoid It:
- Understand the Costs: Before taking out the loan, ask the lender about the discharge fee and factor it into your overall loan costs.
- Negotiate: Some lenders may be willing to reduce or waive the discharge fee, especially if you are refinancing with another lender.
Loan fees are an inevitable part of borrowing, but understanding them and knowing how to avoid or minimise them can save you a significant amount of money. Always read the fine print, ask questions, and compare different lenders to find the best deal. By being proactive and informed, you can navigate the loan process more effectively and avoid unnecessary costs.
For more detailed information on loan fees and how to manage them, consider consulting resources such as the Consumer Protection website, the Commerce Commission, and your lender’s fee schedule.