Lenders can still charge break and discharge fees

The prohibition on mortgage exit fees, contained in a regulation that passed by the Senate on Wednesday, does not apply to break fees or discharge fees, nor to  some other fees. The exit fee ban, which is targeted at deferred establishment fees, takes effect on July 1.

The Australian Securities and Investments Commission issued guidance on the pricing and application of these other fees last August. Basically, lenders can recover costs but no more.

ASIC said it would consider how transparent the contract terms were to the borrower, and the context in which the fees appeared in the contract.

It said consumer protection was provided by prohibitions in the ASIC Act against false or misleading representations or conduct.

A break fee is charged when a borrower pays out a fixed rate loan before the term of the loan matures. The fee relates to any loss suffered by a credit provider resulting from the difference between the fixed rate and the variable rate at the time the loan is paid out.

A discharge fee covers the lender's costs in the normal course of terminating a credit contract. It might include administration, processing and legal costs.

There is no ban on exit fees in a credit contract that is not secured by a residential property.

The ban does not apply to exit fees included in credit contracts entered into before July 1.

Nor is there any ban on fees or charges incurred before the termination of a credit contract that is ended before any credit has been provided.

A solicitor with Corrs Chambers Westgarth, Andrew Galvin, said an issue that might cause some uncertainty in the transition period was the treatment of refinance, as opposed to a loan variation.

Galvin said: "Refinance will be affected. It will be seen as a new contract. But when is a loan varied and not refinanced?"

He said there might also be some uncertainty about the status of credit contracts approved before July 1 but not entered into until after that date.