When you lock in a fixed rate on an investment loan, the interest rate is only part of what you're committing to.
The fees attached to fixed rate products vary between lenders, and some of those differences can add thousands to your borrowing costs over the life of the loan. If you're comparing options on a property around Cheltenham or anywhere else in the Bayside area, knowing which fees are standard and which are negotiable makes a material difference to your decision.
Application and Establishment Fees on Fixed Rate Products
Most lenders charge an upfront establishment or application fee when you take out a fixed rate investment loan. This fee typically sits between $300 and $600, though some lenders charge more and a small number charge nothing at all. The fee covers the lender's cost of processing your application and setting up the loan account, and it's usually deducted from your loan amount at settlement rather than paid separately.
In our experience, borrowers often focus heavily on the interest rate and miss the fact that one lender's $600 establishment fee and another's $0 fee can swing the total cost comparison when the rates are close. If you're borrowing to purchase a unit near Cheltenham station or a house closer to the bay, the establishment fee is a one-off cost, but it's worth factoring into your comparison when you're weighing up investment loan options.
Ongoing Account Fees and What They Cover
Fixed rate investment loans usually come with a monthly or annual account-keeping fee. Monthly fees typically range from $10 to $15, which works out to $120 to $180 per year. Some lenders package this into an annual fee instead, which might sit around $200 to $400 depending on the product.
The account fee covers the lender's cost of maintaining your loan account, processing repayments, and providing statements. It applies whether you're making principal and interest repayments or interest-only payments. Not all lenders charge an ongoing fee, and some waive it if you hold other products with them, such as a transaction account or offset account linked to a separate variable loan.
Consider a buyer who fixes a $600,000 loan on a two-bedroom investment unit in Cheltenham at 5.89 per cent for three years. If the lender charges a $15 monthly fee, that's $540 in account fees over the fixed period. If another lender offers the same rate with no monthly fee, the difference is $540. That's not insignificant, especially if you're holding multiple investment properties and each one carries its own set of fees.
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Break Costs and How They're Calculated
Break costs apply when you pay out a fixed rate loan before the end of the fixed term. This includes full repayment, refinancing, or making additional repayments beyond any allowed limit. The cost is calculated based on the difference between the rate you locked in and the rate the lender can now lend that money out at for the remaining fixed period.
If rates have fallen since you fixed, you'll usually face a break cost because the lender is losing the higher interest income they were expecting. If rates have risen, the break cost is often zero or minimal. The calculation is not straightforward and varies between lenders, but most use a wholesale rate benchmark rather than their current advertised fixed rates.
Say you fixed at 6.2 per cent for five years on a $500,000 investment loan, and two years in you decide to sell the property. If the lender's current wholesale rate for a three-year fixed term is 5.5 per cent, you may face a break cost in the range of $15,000 to $20,000, depending on the lender's formula. Some lenders cap break costs or offer partial waivers in certain circumstances, but those terms are set out in the loan contract, not negotiated at the time you want to exit.
Loan Discharge Fees When You Sell or Refinance
When you sell an investment property or refinance to another lender, your current lender will charge a discharge fee to remove their mortgage from the title. This fee typically ranges from $250 to $400. It covers the lender's administrative cost and the cost of instructing a settlement agent or solicitor to prepare the discharge documents.
The discharge fee applies to both fixed and variable loans, but it's particularly relevant on a fixed loan because you'll also need to account for any break costs at the same time. If you're planning to sell within the fixed period, the combined cost of discharge and break fees should be part of your decision about whether to fix in the first place.
Valuation Fees and Who Pays Them
Lenders require a property valuation before approving an investment loan, and most pass the cost on to the borrower. Valuation fees for a standard residential property in Cheltenham typically sit between $200 and $400, depending on the property type and location. Some lenders cover the valuation cost as part of a promotional offer, and some brokers, including First Home Loan Co, have access to lender promotions that waive valuation fees on certain products.
The valuation is used to determine the loan-to-value ratio and whether Lenders Mortgage Insurance is required. It's a separate cost from the establishment fee and is usually paid upfront or added to the loan amount. If you're purchasing a property with a body corporate, such as a unit in one of the low-rise developments near Charman Road, the valuer will also review the body corporate records as part of their assessment.
Lenders Mortgage Insurance and How It Affects Borrowing Costs
If you're borrowing more than 80 per cent of the property value, the lender will require Lenders Mortgage Insurance. LMI is a one-off premium calculated based on your loan amount and loan-to-value ratio, and it protects the lender in the event you default. The premium is paid by you, and it can range from a few thousand dollars to tens of thousands depending on the loan size and deposit.
LMI is not specific to fixed rate loans, but it's a significant cost that applies at settlement and should be factored into your total borrowing costs. The premium can be paid upfront or capitalised into the loan amount, and some states charge stamp duty on the LMI premium as well. If you're weighing up whether to borrow at 85 per cent or wait until you have a 20 per cent deposit, the LMI cost is often the deciding factor.
Package Fee Waivers and When They Apply
Some lenders offer a package discount that waives certain fees in exchange for an annual package fee, typically $350 to $400. The package may waive establishment fees, ongoing account fees, valuation fees, and sometimes discharge fees. It may also include a rate discount on the loan.
Whether a package makes sense depends on how many fees you'd otherwise pay and how long you plan to hold the loan. If you're taking out a fixed rate investment loan and expect to hold it for the full fixed term, a package that waives ongoing fees and offers a rate discount might save you money. If you're likely to sell or refinance within a year or two, the package fee itself could outweigh the savings.
Comparing Total Costs Across Lenders
When you're comparing fixed rate investment loans, the interest rate alone doesn't give you the full picture. Two lenders offering the same rate can have total costs that differ by several thousand dollars once you account for establishment fees, ongoing fees, valuation fees, package fees, and any rate discounts or fee waivers.
A useful approach is to calculate the total cost over the fixed period, including all fees and the interest payable. If you're borrowing $600,000 and fixing for three years, add up the establishment fee, three years of account fees, the valuation fee, and the total interest payable at the advertised rate. Then compare that figure across lenders. That's the number that matters, not the rate in isolation.
If you're looking at investment property finance for a property in Cheltenham or the surrounding Bayside suburbs, working through that comparison with someone who has access to a range of lenders can save you time and money. Call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
What are the typical upfront fees on a fixed rate investment loan?
Most lenders charge an establishment or application fee between $300 and $600, plus a valuation fee typically between $200 and $400. Some lenders waive these fees as part of promotional offers or package deals.
How are break costs calculated on a fixed rate investment loan?
Break costs are calculated based on the difference between your fixed rate and the lender's current wholesale rate for the remaining fixed period. If rates have fallen since you fixed, you'll usually face a break cost, which can range from several thousand to tens of thousands depending on the loan size and time remaining.
Do fixed rate investment loans have ongoing account fees?
Yes, most fixed rate investment loans charge a monthly account fee between $10 and $15, or an annual fee between $200 and $400. Some lenders waive this fee if you hold other products with them or take out a package.
What is a loan package fee and when does it make sense?
A package fee, typically $350 to $400 per year, may waive establishment fees, ongoing account fees, valuation fees, and discharge fees, and can include a rate discount. It makes sense if the total fees waived and rate discount exceed the annual package cost over the period you hold the loan.
What fees apply when I sell or refinance a fixed rate investment loan?
You'll pay a discharge fee, typically $250 to $400, to remove the lender's mortgage from the title. If you're exiting before the end of the fixed term, you'll also face break costs, which can be substantial if interest rates have fallen since you fixed.
