Home Loan Basics
Understand Interest and FeesA lender charges fees and interest when it provides home loans. What are these and what are they for? We'll explain here.
Home Loan Basics
Interest:
A bank or lender will charge you interest in exchange for the benefit of borrowing money. The interest rate charged on your home loan will depend on the loan term and type of loan type taken. See our 'Get familiar with home loan types' guide, linked in related guides below, for more information on the different types of loans available.
For example, you borrow $100,000 for one year on an interest only home loan, with an interest rate of 5.00%. The total interest cost for borrowing the $100,000 is $5,000.
Fees:
While obtaining and repaying your home loan, you may come across different fees associated with the loan. Below are some of the most common fees which you may encounter on your home loan journey:
Loan application fee
This is a fee that may be charged by the lender for providing you with a home loan. If charged this will be noted in your home loan documents.
Loan top-up fee
Similar to the application fee, when you apply for a top up or increase your home loan, you may be charged a fee for doing so
LEP / LEM
LEP and LEM are abbreviations for Low Equity Premium and Low Equity Margin. A bank will have one or the other and it is a lenders fee or margin that is charged for loans where LVR is over 80%, in other words, the deposit is less than 20%. This applies to all of the lending, not just to portion of above 80%. The LEP is generally charged as a lump-sum which is added on top of your home loan.
Rate lock amendment fee
If you have signed an agreement with your bank to lock in your home loan for a fixed term, e.g. they have offered a rate of 5.00 % p.a. for 3 years which you have agreed to, and you decide to break or amend your term and the interest rate agreed to, the bank may charge a fee to be able to amend as required.
Early repayment fee
This is a fee charged when you repay your fixed home loan earlier than originally documented. This fee is typically only charged on home loan accounts that have a fixed interest rate and will vary in value depending on the amount of the loan and outstanding fixed interest rate term. An early repayment fee may also be charged if you are on a fixed rate and want to make a lump sum repayment more than 5% of the balance of the loan.
Discharge fee
When you have completely paid off your home loan, selling or refinancing you will discharge your mortgage, which means to remove the property as the bank's security. When this happens, there may be an admin fee charged from your bank or lender to do so.
Default fee
Many lenders have different fees for defaulting on payments. If you miss your repayments, you may be charged a default fee as well as default interst costs, but the details of the type of default fee and interest costs applicable will always be made aware to you in your loan documents or terms and conditions.
Related Questions
What is LVR?
The amount of the loan financed as a proportion of the property value, expressed as a percentage. Eg, for a home loan of $600,000 secured by a house valued at $800,000, the LVR is 75%.
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