Avoid These 5 Fixed Rate Loan Fees and Costs

Fixed rate home loans come with more than just the advertised interest rate.

Application fees, valuation costs, settlement charges, and ongoing account fees can add several thousand dollars to your borrowing costs before you even start paying down your loan amount. For someone adding a granny flat using a construction loan, these costs can stack up quickly if you're refinancing or topping up an existing mortgage to fund the build.

Application and Establishment Fees on Fixed Rate Loans

Most lenders charge an upfront application or establishment fee when you apply for a fixed rate home loan. This fee typically ranges from $300 to $600 and covers the lender's administrative costs for processing your application. Some lenders waive this fee during promotional periods, but it's usually non-refundable even if your application is declined. If you're applying for a split loan where part of your borrowing is fixed and part is variable, you may be charged this fee twice, once for each loan portion.

Consider a borrower refinancing to release equity for a granny flat build valued at $150,000. If the new lender charges a $600 establishment fee and the loan is structured as a split, with $300,000 fixed and $150,000 variable, the combined establishment fees could reach $1,200 before any other costs are factored in.

Valuation and Legal Costs You Can't Avoid

Lenders require a registered valuation of your property before approving any home loan, and this cost is almost always passed on to you. Valuation fees typically range from $200 to $400 for a standard residential property, though they can be higher for properties on larger blocks or in regional areas. Legal fees for settlement, including document preparation and registration, usually add another $800 to $1,500 depending on your state and the complexity of the transaction.

If you're refinancing to fund a granny flat, you'll also need a valuation that accounts for the proposed secondary dwelling. Some lenders will accept a desktop valuation for straightforward refinances, which can reduce the cost to around $150, but construction lending for a granny flat typically requires a full site inspection and valuation.

Ongoing Monthly and Annual Account Fees

Fixed rate home loans often carry ongoing account-keeping fees. These monthly or annual charges usually range from $10 to $15 per month, which works out to $120 to $180 each year. Over a five-year fixed term, that's $600 to $900 in account fees alone. Some loan products also charge a package fee if you want access to features like an offset account linked to your variable portion or a discounted interest rate. Package fees typically cost $300 to $400 per year.

If you've taken out a split loan to fund a granny flat, you may be paying account fees on both the fixed and variable portions. In that scenario, your total annual account fees could reach $350 to $400 depending on the lender's fee structure.

Break Costs and Early Exit Penalties

Breaking a fixed rate loan before the end of the fixed term can trigger substantial costs. Lenders calculate break costs based on the difference between your fixed interest rate and the current wholesale funding rate, multiplied by the remaining term and your outstanding loan balance. If rates have fallen since you locked in your fixed rate, the lender has lost the opportunity to earn that higher return, and they pass that loss on to you.

In a scenario where a borrower fixed $400,000 at a rate that's now significantly above the prevailing market rate, with three years remaining on the fixed term, break costs could reach $15,000 or more. This becomes particularly relevant if you need to sell the property or refinance early to access additional equity for a second granny flat or other investment.

Discharge Fees When You Refinance or Sell

When you pay off your fixed rate loan, either through refinancing or selling the property, your lender will charge a discharge fee. This fee covers the administrative cost of removing the mortgage from the property title and typically ranges from $300 to $500. If you're refinancing from one lender to another, you'll pay a discharge fee to your old lender and an establishment fee to your new lender, which compounds the total cost of switching.

For borrowers who initially used home equity to build a granny flat and are now refinancing to access further equity or secure a lower rate, the combined discharge and establishment fees can exceed $1,000 before factoring in valuation and legal costs.

Understanding these fees upfront means you can compare home loan products accurately and factor the true cost into your granny flat budget. If you're weighing up a fixed rate loan or considering a split loan structure, call one of our team or book an appointment at a time that works for you.

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