Hidden Fees to Watch Out for in Bank Mortgages
For many Kiwis, buying a home is one of the biggest financial decisions they’ll ever make. While most focus on the headline interest rates and deposit requirements, there are numerous hidden fees associated with bank mortgages that can catch first-time buyers off guard. Understanding these costs is crucial for effective budgeting and avoiding unpleasant surprises during the home-buying process. This article will explore the common hidden fees in bank mortgages in New Zealand and provide practical tips on how to manage them.
Common Hidden Fees in Bank Mortgages
1. Low Equity Margin (LEM)
If you’re borrowing more than 80% of the property’s value, banks often charge a low equity margin. This is an additional interest rate on top of the standard rate, typically ranging from 0.25% to 1.75% depending on your loan-to-value ratio (LVR). For example, Westpac adds a low equity margin between 0.25% to 1.75% depending on the LVR.
2. Application or Establishment Fees
Many banks charge a fee for processing your mortgage application. This can range from $150 to $400, depending on the lender.
3. Valuation Fees
Banks often require a professional valuation of the property you’re purchasing. This can cost between $500 to $1,000, depending on the property type and location.
4. Legal Fees
While not strictly a bank fee, legal costs are an unavoidable part of the mortgage process. These can range from $1,500 to $3,000, depending on the complexity of the transaction.
5. Loan Splitting or Restructuring Fees
If you want to split your loan into different portions (e.g., fixed and floating rates) or restructure your existing loan, banks may charge a fee. For instance, Kiwibank charges $25 per change when you ask to split or combine existing loans or change the loan type.
6. Early Repayment Fees
If you’re on a fixed-rate mortgage and want to pay it off early or refinance, you may face significant break fees. These can potentially run into thousands of dollars, depending on the remaining term and interest rate differential.
7. Ongoing Account Fees
Some banks charge ongoing account maintenance fees. For example, BNZ charges a $2 monthly base fee for their Rapid Repay and Mortgage One revolving home loans.
8. Insurance-Related Fees
Banks often require you to have home insurance as a condition of your mortgage. While not a direct bank fee, this is an ongoing cost you need to factor into your budget.
The Impact of Hidden Fees
Hidden fees can significantly impact your overall borrowing costs. For example, a low equity margin of 0.75% on a $500,000 mortgage could add an extra $3,750 to your annual interest payments. Over a 30-year mortgage term, this could amount to over $100,000 in additional interest.
Moreover, unexpected fees can strain your budget, especially in the early stages of homeownership when you’re adjusting to new financial responsibilities.
Tips for Managing Hidden Fees
- Read the Fine Print: Carefully review all loan documents and ask your bank to explain any fees you don’t understand.
- Shop Around: Different banks have different fee structures. Compare offers from multiple lenders to find the best overall deal.
- Negotiate: Don’t be afraid to ask your bank to waive or reduce certain fees. They may be willing to do so to secure your business.
- Save a Larger Deposit: If possible, try to save a 20% deposit to avoid low equity margins and potentially negotiate better terms.
- Consider a Mortgage Broker: A good mortgage broker can help you navigate the complexities of different loan offers and potentially access better deals.
- Budget for Additional Costs: Factor in all potential fees when budgeting for your home purchase. The New Zealand government recommends budgeting around $3,000 for legal fees alone.
- Plan for the Long Term: If you’re considering a fixed-rate mortgage, think carefully about potential break fees if your circumstances might change.
- Regular Reviews: Once you have your mortgage, regularly review your loan structure and fees. As your equity grows, you may be able to negotiate better terms.
While hidden fees in bank mortgages can be frustrating, they’re an unavoidable part of the home-buying process in New Zealand. By being aware of these potential costs and planning accordingly, you can better manage your finances and avoid unpleasant surprises.
Remember, buying a home is a long-term commitment. Take the time to understand all aspects of your mortgage, including the fees, to ensure you’re making the best decision for your financial future. If in doubt, don’t hesitate to seek professional advice from a financial advisor or mortgage broker. With careful planning and informed decision-making, you can navigate the complexities of bank mortgages and achieve your dream of homeownership.