It has been just more than a year since the government banned exit fees on new home loans and despite dire predictions this could force some smaller lenders out of business or see borrowers slugged with higher upfront charges, the reform has proven to be a win for consumers.

Research shows that overall, upfront loan fees have fallen, giving borrowers valuable savings plus the opportunity to switch to a cheaper loan without the sting of exit fees.

According to financial comparison site RateCity, the cost of upfront or loan establishment fees has dropped from an average of $707 in early 2011 to about $673 in mid-2012. That said, the majority of variable home loans – about 72 per cent – still come with upfront fees, which can include application, settlement and valuation charges. Where they apply, you could pay as much as $1000, yet it is a cost that can be avoided altogether.

A number of lenders like Bank MECU, Bank of Queensland and National Australia Bank have scrapped upfront fees from some of their loans. In the last few years competitive online lenders like eMoney and UBank have sprung up, many offering home loans with no loan application or administration fees.

With such a wide variation in upfront fees, you should definitely shop around for a loan that minimises this cost. Be aware, too, some lenders may offer a cheap rate while charging solid upfront charges. Others may compensate for low initial costs by charging a higher rate.

The only way to get a true idea of what you’re really paying for a loan is by using the comparison rate. This takes into account upfront plus ongoing fees (though not government charges), making it a lot easier to compare between loans and lenders.

The comparison rate will vary according to the size of the loan. So while you may see a rate displayed in a lender’s promotional material, it may not be the rate that applies to your particular loan. For a personalised rate you’ll need to ask lenders for their home loan fact sheet. These were introduced at the start of the year and all lenders are legally obliged to provide them if asked.

It can be tempting to add any upfront charges to the amount you borrow – a process known as capitalising the expense, but I don’t recommend it. You’ll end up paying interest on the upfront costs and that means paying a lot more over time.                

• Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit www.paulsmoney.com.au for more information.

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