You’ve jumped through hoops to gather the seemingly endless documentation required for your home loan application and finally you’ve been offered a loan.
But there’s some serious reading to be done before you sign on the dotted line. Ignoring the fine print in your loan documents could literally cost you thousands of dollars.
Brokers report they have seen borrowers get badly burned by being “too rushed, too bored or too lazy” to read the fine print.
While up to 90 per cent of the terms and conditions in your loan contract will be the same as those in the next loan contract, you’ll need to pay special attention to the 10 per cent that is different. These are the details that are specific to your loan, and its essential that you understand these conditions before you sign.
Dive into the details
Usually the details of all fees you can expect to pay will be buried in the fine print of your contract.
From ongoing fees such as annual account fees to one-off payments for valuation, settlement or offset accounts and user-pay fees for redraws and bank cheques, there’s a cost to nearly every feature of your new loan.
David Fleming, Equity Resource sales director, says one of the fees that take people by surprise is the mortgage registration fee, which is charged by state and territory governments to register the security for a loan. This fee varies across states, ranging from $116 in Victoria to $187 in Queensland.
Don’t underestimate LMI
One of the heftiest fees borrowers face, and one that is often underestimated, is the lenders’ mortgage insurance (LMI).
If you borrow more than 80 per cent of the value of your home, you’ll need to pay LMI. The higher your loan to value ratio (LVR) – that’s the percentage amount of the value of a property that a lender will allow you to borrow – the higher your LMI will be.
Fleming says borrowers with a 95 per cent LVR could be looking at LMI upwards of 3 per cent. So on a $500,000 property, you could be paying a rather hefty $16,245.
“A lot of younger borrowers don’t know about LMI and they can really freak out,” says Fleming. Some buyers choose to delay a property purchase in order to save a larger deposit and either reduce their LMI or avoid it all together.
Hamish Scott, a commercial law director with Everest Scott, advises borrowers to read the default provisions carefully.
“Clients are often surprised by how many things the lender can default you on,” he says.
The most obvious default position is when you fail to pay your repayments. If a borrower is 90 days or more behind on making a repayment, default fees can range from $9 up to $195 according to RateCity, a financial comparison website.
But you’ll also need to keep your loan to equity value up, so that the value of your home remains higher than the amount you have borrowed.
You can be in breach of the mortgage if you are in the middle of renovations and your house isn’t liveable; if your renovations have not been approved by council; or if you are uninsured.
Other events leading to default include being jailed or declared bankrupt.
The lender can instruct you to rectify these issues and if you don’t, they can take legal action and recover their legal costs from you.
Low doc equals high fees
When it comes to a low doc loan – often the only choice if you’re self-employed – the required paperwork may be less onerous, but you can expect to pay for it in the loan conditions.
“The lower the documentation the higher the fees, the higher the interest rates and the more risk involved,” says Scott.
Low doc loans can be a lifesaver for borrowers with less secure income, however RateCity reports you may pay up to one per cent more on your interest rate, upfront fees can be steep and LMI may kick in at 60 per cent LVR instead of 80 per cent.
Fleming says borrowers need to remember that financial institutions have direct access to your money to recover fees.
“If they charge you a fee they can draw it out of your loan account immediately and start charging you interest from day one,” he says. “It’s not like business done everywhere else when you’ll be issued with an invoice and given 14 days to pay.”
So if you take issue with a fee, you may have a battle to fight to recover that fee from your lender.