Capitalising Loan Fees
When you take out a home loan the lending institution may charge one or more of a range of fees.
Administration fees
These are normally charged to cover the time the lending consultant took to review your application and approve your loan. Typical administration fees are around $250 to $500 for new loan applications. Additional fees may be charged for loan top ups or variations.
Lenders mortgage insurance and low equity premiums
These generally apply where the funds borrowed represent more than 90% of the value of property you're buying. These fees are a percentage of the loan amount and are calculated on a sliding scale depending upon your loan to value ratio.
Capitalising fees
Capitalising your fees means the fee amount is added to the total loan amount - so you won't have to pay the fee up front. If fees are being capitalised this will change the total amount being borrowed or financed.
Fees disclosed on Fundit
In the Fundit auction process lenders will explain any fees payable as part of their bid. The lender will also indicate whether these fees can be capitalised (added to the loan). During the loan documentation process you can then advise the lender whether you would prefer to have these fees capitalised or to pay the fees up front in cash.
When a lender makes a bid on your auction you should check to see whether they have capitalised the fees as part of their calculation. You need to be able to make an ‘apples with apples' comparison when reviewing your bids and fees that have been capitalised will slightly increase the amount of your monthly or fortnightly repayments.
Examples
Example 1:
Loan principal applied for by Paul and Sarah $350,000
Administration fee (capitalised) $250
Low equity premium (capitalised) $1,000
Revised total loan principal $351,250
The revised total is the amount upon which your interest and principal repayments will now be calculated.
By using Fundit's rate comparison calculator [Link to 3.2 Mortgage calculators - rates comparison calculator] we can see that, if the total loan principal is $351,250, the monthly principal and interest payments over 30 years at an interest rate of 8.50% would be $2700.81 per month.
If Paul and Sarah paid the fees in cash up front and did not add them to the loan then the monthly repayments of principal and interest over 30 years at an interest rate of 8.50% would be $2691.20 per month - a difference of $9.61 per month.
Example 2:
David and Nicole want to borrow 95% of the purchase price of a house and have received a bid offering no application fee. David and Nicole are both 26 years old and this is their first home purchase. They have saved diligently for their deposit and knew that the bank would likely have a low equity premium but were not sure how much this would be. They need all of their spare cash from ongoing savings to purchase furniture for their new home so they take the opportunity to capitalise the low equity premium, understanding that this will slightly increase their ongoing regular repayments.
Loan principal applied for David and Nicole $380,000
Low equity premium $1,500
Revised total loan principal $381,500
Use Fundit's rate comparison calculator [link to 3.2 Mortgage calculators - rate comparison calculator] to assess the difference in monthly or fortnightly repayments for David and Nicole if they paid the low equity premium in cash.
Example 3:
John and Rachel are refinancing their existing home loan and their loan to value ratio is under 80%. The loan amount is $290,000 and they have used Fundit to get a better deal from a new lender.
They don't need to consider lenders mortgage insurance or low equity premiums but they do have a $250.00 application fee to pay. John and Rachel have been in their home for a couple of years and are both fully employed. They have spare cash from savings and decide that it's better to pay the fee in cash so as not to increase their loan repayments.
Total loan principal applied for by John and Rachel $290,000
Use Fundit's rate comparison calculator [link to 3.2 Mortgage calculators - rates comparison calculator] to assess the difference in monthly or fortnightly repayments for John and Rachel if they didn't pay the application fee in cash.
