What is an exit fee and is it fair?

28/06/2010

Mortgage break fees, sometimes known as deferred establishment or exit fees, are a fairly common feature of home loans in Australia. They usually apply in the first three years of a loan, though sometimes five years, and allow a lender to recover some of the up-front costs of setting up the loan that were not charged to the customer at the time of taking out the loan. Consumer law in Australia has, since the mid 1990s, at least in theory, obliged lenders to align break fees with actual costs incurred.

The present law, adopted by the Australian parliament last year, is an updated version of the same principles. As before, however, the regulator will be pretty toothless since it is up to courts (at the request of borrowers or the regulator) to intervene and modify borrowers’ contracts. The most egregious break fees are those of lenders with aggressive growth strategies prior to the GFC and which are no longer in the market, principally RHG, formerly Rams Home Loans, and GE Capital, including its former subsidiary Wizard Home Loans.

The most common dispute referred to the Financial Ombudsman Service is over break fees, though the number in dispute is in the low thousands, compared with hundreds of thousands of new loans taken out each year.

Source: Banking Day