Last hurrah for fee-free home loans

Ian Rogers

Zero application fees on home loans – one of the long-standing price gimmicks used by banks to stir up demand – will soon be a thing of the past.

Westpac, starting off through Rams, and now Commonwealth Bank, which is advertising heavily, are leading what may be the last push to make use of this pricing lever.

The fees being waived are not all that steep, if anything they are somewhat lower than banks and non-bank lenders have charged in the past.

Establishment fees on a home loan over the last six months of 2010 averaged $463, data compiled by RateCity shows, with 73 per cent of lenders charging these up-front fees.

There are also disbursements (for valuations and similar) and often mortgage insurance too, on top of the stamp duty that many loans help fund.

So the gimmick saves only a small amount of the up-front cost of taking out a home loan.

From July 2011, exit fees will be illegal, in line with government policy (and assuming Parliament adopts the planned law).

Exit fees, where they apply, range from less than $1000, at the low end, up to several thousand dollars at the higher end. Affected lenders will have to recover this loss of fee income through up-front fees or higher interest rates.

Up-front fees on home loans could thus easily be $2000 and perhaps more in six months time, a fact likely to prove frustrating for lenders and adding to the rationale for making the most of the "fee-free" carrot while it’s still possible.

Mortgage insurance, another up-front impost, can add several thousand dollars more again to a loan, depending on the deposit or cross-collateral a borrower can bring, and the size of the loan.