Do you have to pay an exit fee?

Bank fees. They are the clear exception from that wise old saying that the only certainties in life are death and taxes. And one of the most hated bank fees for anyone buying and selling real estate is the home loan early exit fee. Why should you be charged a fee for repaying your loan early?

Thankfully there is some good news when it comes to this much-despised fee. It all depends on when you entered into your mortgage.

What’s the law say?

Previously, lenders could charge borrowers who repaid their loan ahead of time an early exit fee, which supposedly helped the lender cover the cost of lost interest earnings over the remainder of the loan period. Usually, exit fees were restricted to the first five years of a loan and often differed between a fixed-rate mortgage and a variable mortgage. An exit fee was charged as a fixed fee or calculated according to the outstanding loan amount.

Luckily for borrowers, in 2011 the Federal Government outlawed home loan exit fees. That means that for all new mortgages, an exit fee must not by law be included in the repayment terms. If you’re worried that your lender may simply call the fee a different name, don’t be – that is illegal too. Any lender trying to impose a home loan exit fee, or a similar fee by a different name, can be heavily fined.

Winners and losers

The downside is that this ban applies only to home loans taken out since 1 July 2011. If you entered into your current mortgage before 1 July 2011 and are now trying to either refinance your home loan or pay off your loan, you will still have to pay any exit fees charged by your lender. Check the terms of your mortgage agreement to see if an exit fee forms part of the conditions you signed and, if so, how much you will be charged.

If you are entering into a new mortgage now, your loan agreement won’t include any exit fees. If it does, you should not sign it; in fact, you should bring it to the attention of your loan officer because, as already mentioned, the fee is illegal. Similarly if you are refinancing your current loan (entered into on or after 1 July 2011), the new loan agreement should not contain any exit fees.

Paying an exit fee

If you are looking to refinance your current loan, or pay it off completely, be sure to determine whether you will have to pay an exit fee. If you will, consider the cost of this fee and whether it is in fact better to see out the remainder of the loan.

If you only have a small amount remaining on the mortgage, a hefty exit fee could end up costing you more than the extra interest you will pay by leaving the loan to run its course. Similarly, refinancing to a better deal may be less attractive once you add in the cost of an exit fee.

Having said that, you can still avoid paying the fee. Some lenders no longer charge any customers an exit fee. If yours does, ask a new lender to pay the exit fee for you as an incentive to refinance with them. Many lenders will do this in order to secure your business, saving you hundreds if not thousands on top of the benefits you may get from refinancing.

You’ll find more information on exit fees and other typical fees on home loans on the government’s MoneySmart website.

Nothing makes more financial sense than to avoid paying unnecessary fees. Be sure to check that you aren’t being wrongly charged an exit fee. If you are required to pay one, try to negotiate your way out of it. If there’s no getting out of it, calculate just how much you will be charged and factor that into your budget: you wouldn’t be the first to be caught out by this painful thorn in the side!