A great article taken from the Sunday Examiner 10/4/11 looking at the effect banning exit fees will have on home loan comparison rates.

Mortgage costs unveil the real figure
John Kavanagh (taken from the Sunday Examiner 10/4/11)

The banning of exit fees means comparison rates will give a better guide to the cost of a mortgage.

Home-loan comparison rates will give borrowers a better idea of the all-up cost of their loan, following the passage of legislation last month banning mortgage exit fees.

So-called back-end charges, such as deferred establishment fees, early termination fees and exit fees, have not been included in comparison rates and this has raised questions about their reliability.  Now many of those fees will no longer apply.

Comparison rates, also called average annual percentage rates, combine interest rates and fees to give borrowers a picture of the total cost of a loan. 

They have been available on websites such as Canstar Cannex and InfoChoice for many years and in 2003, lenders were required to distribute them with loan application documents.

That requirement was removed with the introduction of the national credit law in 2009 but if lenders advertise a rate, they must still show the comparison rate.

Consumer finance websites still feature them in their interest rate tables.

An amendment to the National Consumer Credit Protection Act was passed on March 23, banning exit fees on all home loans sold after July 1 this year.  The ban applies to fees payable on the termination of the loan.

The ban does not cover break fees for early repayment of fixed-rate loans or discharge fees that reimburse the lender for reasonable administrative costs of terminating the loan contract.

The ban does not apply to loans that are not secured by residential property.  Exit fees in credit contracts entered into before July 1, 2011, will still apply.

A partner at Ganes Lawyers, Jon Denovan, says that because back-end fees such as deferred establishment fees were optional or contingent, they were never included in comparison rates.

“With a lot of those fees now banned, the comparison rate will be a better guide,” he says.

Mr Denovan says borrowers still need to take care with comparison rates, however.

“There are still some optional fees that are not included,” he says.

“They include redraw fees and administrative charges for handling one-off repayments.  The other thing to remember is that the comparison rate will not include current discount offers or fee waivers.”

A number of lenders have applied to the Australian Securities and Investments Commission for exemptions.

“A borrower might have taken out a shared equity mortgage that pays the lender half the capital gain when the loan is paid,” Mr Denovan says.

“Under the law, that is an exit fee.  We would expect to see an exemption for that type of arrangement.”

An analyst with InfoChoice, David Lalich, agrees that while comparison rates are a useful tool, borrowers need to take care.

“There is a danger (that) comparison rates will lead some consumers to oversimplify their loan choice and not look beyond the price of a loan to the suitability of features,” he says.

“A comparison rate only looks at pricing.  It does not take into account the value of features such as repayment flexibility, redraws and offset accounts, which … can reduce costs significantly.”