The first question that most people ask when they want to take out a mortgage is “Which bank offers the lowest interest rate on the market?”. Others spend countless hours ringing different lenders to compare what interest rates are on offer. However, if all you’re doing is comparing interest rates, you’re only getting half of the story. You need to know what the borrowing costs will be to get the complete picture.
The Trade-off
As you research and compare loans, you will quickly learn that interest rates is only one of many steps. That's because borrowing costs can add to the overall cost of holding down a property.
There is usually a trade-off between low interest rates and borrowing costs. Some lenders may offer very low interest rates, but they may charge higher borrowing costs. Others will offer you lower borrowing costs, but higher interest rates.
The best way to work out whether you’re getting a great loan is to break down the borrowing costs and interest repayments. Make sure that you also check with the Australian Tax Office what borrowing costs you can and cannot claim. When you do this you will be in a better position to find out whether a particular loan is suitable or not.
Typical Borrowing Costs
Lenders Solicitor Fee
Solicitors for the lender often charge a fee to prepare and file mortgage documents.
Establishment Fee
An establishment fee (also referred to as an "application" or "start-up fee") is a one-off fee that is charged when the loan is first setup. The fee may vary depending on the type of loan you're taking out, such as the difference between a line of credit vs a fixed rate loan.
Title search fees
Land titles, valuation and related property information is held in a registry. A fee is usually charged to access this information.
Mortgage broker fees
Mortgage brokers are the middlemen who can help you choose from a large pool of lenders. Brokers are normally paid a commission for arranging your loan, however they can charge a fee directly to their clients, so find out what this fee is.
Property valuation
An independent valuer is usually choosen by the lender, and this fee is usually passed on to the client. The final assessment of the property will generally be lower than market value, and even this amount will vary from lender to lender, however this valuation does not reflect what the property will actually sell for.
Lender's Mortgage Insurance
This is insurance that covers the bank for taking on borrowers who have less than the required deposit (generally around 20 per cent).
Government Charges
Governments can impose fees such as stamp duty, title registration and other charges. One of the biggest cost will be stamp duty.
Stamp duty is charged by the state government depending on where the property is located. It is the tax levied on the transaction of transfering land or property ownership.
Use our Stamp Duty Calcuator to work out how much duty you will have to pay for your property.
Tax Implication
According to the Australian Tax Office, for expenses that are less than $100, you can generally claim this back in your next tax return. But if the cost is greater than this threshold, you can spread the cost over 5 years or over the life of the loan, whichever is less.
Other Costs
There may be other ongoing fees and costs associated with your loan, such as on-going account fees, break fees (if you take up a fixed rate loan), or an early repayment fee. It's wise to know what these fees are. They can be found in the lenders credit contract or by visiting their website.