Whether you are a first home buyer, investor or looking at refinancing, not understanding the truth behind the details of your mortgage can have long term financial impacts to you and your family. In an increasingly competitive and saturated market, the number of different facilities, rates, terms and options available can be overwhelming. However, arming yourself with a good understanding of the details of your different loan options means you can maximise the impact of your repayments, and minimise costs that aren’t reducing your principle.

The Real Cost of Your Loan

Mortgages are complex financial products, that combine a number of elements beyond the interest rate that impact not only how much you will pay per month, but also how much of the principal is being repaid with each instalment.

A mortgage is most commonly a 25–30-year commitment. It is easy to look at the costs in a single payment and think that the impact of an extra charge is negligible, but when you weigh it up over the full duration of the loan, these small amounts can add tens of thousands of dollars to your overall cost of accessing your principle. Working with a mortgage broker, means that you will have expert guidance as to the long-term impacts of each component of your repayment, so you can be sure you aren’t ignoring details that have a big impact long term.

Lender’s Mortgage Insurance (LMI)

Charges associated with LMI vary from lender to lender and depend heavily on total loan amount and Loan to Value Ratio (LVR). With the rate of increase in property values in most Metro areas of Australia over the past 15 years it is often is better to buy now and accept the additional cost of LMI in your monthly repayments. However, it is important to understand what the rate of LMI is and how that is reflected in your monthly payments, as every dollar you are spending on LMI is a dollar that isn’t coming off your principal. Over the duration of a loan, this can add up to tens of thousands of dollars. Your mortgage broker will be able to help you easily understand the long-term impacts.

Establishment Fees

Most mortgages come with a once off upfront fee for the establishment of the facility. These fees vary greatly lender to lender and can be rolled into the overall loan amount being taken out. Whilst it might seem easy to compare these fee’s side by side for different lenders and products, the truth is they are often used as a marketing tool to entice customers. Often, when a loan has zero establishment fee’s you will find that ongoing charges are higher, which has a big impact over the duration of your loan. Don’t be distracted by low or zero entry fee offers. With this one, you really must read the fine print, as things are not always what they seem.

Monthly Fees

Lenders tailor their packages to seem attractive to the majority of borrowers who focus solely on fixed and variable interest rates. However, charges like monthly and annual fees can easily make up for losses the lender makes on providing attractive low interest rates. Fees vary anywhere from $100 to $750 per annum which again over the term of the loan can reach tens of thousands of dollars. A good mortgage broker will be able to highlight the full impact of these charges over the life of your loan, and help you choose a package that will mean your repayments are maximising the reduction of your principle in the most efficient way.

Early Exit Fees

When a bank approves a mortgage, they are calculating the total profit they will make from providing you with that facility. More often than not, they will include terms, conditions and charges that will help recoup some of their profit in the situation that a customer refinances with another lender, and the full value of that customers loan will not be realised. Now these exit fees can be called a lot of things. Early exit fees, discharge fees, settlement fees, but in essence they can all add thousands of dollars in charges, depending on the value of your loan, should you want to refinance in the future.

In summary, smart borrowers understand that there is more to a mortgage than interest rates alone. Whilst interest rates, whether fixed or variable can have a huge impact on the total cost of your mortgage, they are not the only factor to consider. A good mortgage broker will be able to show you simply, how each cost associated with the loan will impact you in the longer term.