No more mortgage exit fees, says the law

by Chris Lang on March 25, 2011

No more exit fees I don’t know whether this is a good or a bad news, but from the 1st of July mortgage exit fees are officially banned. To boost competition between lenders this law came into effect 2 days ago.

The purpose is to make shopping for a better loan easier. Paying thousands of dollars in mortgage exit fees today in order to get a loan in another bank with a better interest rate and save tomorrow was a major reason stopping people from switching banks.

Unfortunately the new law only applies to variable interest home loans, taken after July 1, which means that everyone with a fixed interest loan will not have the luxury of refinancing for less.

The reason I am not 100% sure this new law will be good for us is that banks are … creative. They can come up with a new fee to make up for “losses” under the new regulation, and although the word is that ASIC (the finance regulator) has now the power to stop them from disguising an unfair exit fee as something else, that could be easier said than done.

The possibilities are that banks will hide the used-to-be exit fees in inflated application fees, or in the very interest rates. In that case everyone – not just the folk who fancy changing banks often – will be paying the price.

This may also mean less competition for banks (yes, contrary to the intention of the law!). When people can walk out on their lender easily, it will make less sense for banks to pay commissions to mortgage brokers, because each client they refer to the bank will have a higher risk of walking out attached. This spells bad news for mortgage brokers, and a large part of them may be put out of business, which in turn can only mean that more mortgages will be going through major banks, because mortgage brokers won’t be there to recommend smaller lenders as an alternative.

What do you think this law will mean for borrowers?

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