A mortgage is typically the biggest debt you’ll ever own, so the goal is to pay it down fast and smart. Even small mistakes can cost you in repayments and interest, and it’s not just first home buyers who get burnt.
Shockingly, lenders don’t have your best interests at heart, so it’s up to you to avoid the traps, and make wise decisions on your mortgage.
Here’s 7 common mortgage pitfalls you can look out for.
Going directly to a lender rather than a broker
A lender is the financial institute that loans you the money for your home. Once upon a time, there were only a handful of large lenders to choose from; today, competition is higher and that’s good news for you as a mortgagee. However, if you visit a lender directly, you’re only shopping in one store, rather than comparing loans and interest rates across the market.
A mortgage broker is the middle man, who uses your financial details to gather quotes from a large pool of lenders, giving you the chance to choose not just the best interest rate, but also the best loan type for you and any specials or discounts on offer.
Choosing based on interest rate rather than the fine print
It might seem like the lowest interest rate is the best deal, but sometimes low rates hide less desirable features. Break fees, application costs, establishment fees and even variance in Lenders Mortgage Insurance can quickly make your loan more costly than you thought.
In addition, the low rate might only be a ‘honeymoon’ offer that expires into a much higher rate down the track. Be sure you understand all the inclusions of your mortgage for the life of the loan, rather than being wooed the interest rate alone.
Submitting too many home loan applications
While you should absolutely check all lenders to find the best loan for you, it’s a trap to actually apply for the loans to ‘test the waters’ or see what great deal you can nab. Every loan request is recorded on your credit file, which can make you look suspicious to other lenders when they process your application. It could put you on their radar as a bad debtor that other institutions have rejected. Instead, use a mortgage broker to find the lender that suits your criteria and financial situation first, then apply. An extra tip is to make sure the application is exact and correct, otherwise every resubmission is recorded as another rejection.
Forgetting to look for helpful loan features like offset accounts
Not all loans are created equal, and there’s never been more diversity between offerings than there is today. Each loan package can include a host of extras, and choices that you’ll need to make.
For example, you’ll need to choose between fixed or variable rates, or even a mix of the two, depending on your circumstances. An offset account is one of your most valuable tools because it allows you to use your savings as a repayment amount on your loan, reducing your interest. A redraw facility lets you make extra repayments to shave years and thousands of dollars off your mortgage. Choosing a loan with the right features for your mortgage and financial structure will make significant impact on your loan term and overall interest charges.
Opting for a long loan period for the wrong reasons
It’s tempting to choose the longest loan period because of the lower repayments. However, a long loan period means more interest, which adds up to tens of thousands of dollars over the term of the loan. Instead of looking for short-term gain, ask your mortgage broker to calculate various loan terms and see if you can afford to make larger repayments over less time. Even a small addition to your repayments pays big dividends in the long run.
Forgetting to health check your mortgage
Like car insurance, many people fall into the ‘set and forget’ trap for their home loan. After an initial period, you can refinance or switch lenders anytime to take advantage of better rates or deals on offer. Your circumstances might change, for example you may receive a pay rise, which means you should reassess your mortgage and look for ways to pay down your loan faster using the extra income.
It’s a good idea to set a date on your calendar to ‘health check’ your home loan each year. It’s free to ask a mortgage broker to run your numbers again and see what’s on offer. Even your current lender will drop your interest rates if they’re offering something better – but they won’t give it to you unless you ask.
Cross-collateralorising properties for a short-term win
Securing a loan for a property by cross-collatoralising it against another property seems like a good idea initially, because it means you don’t have to front up any of your own money to purchase the home. However, cross-securing properties in this way gives banks all the power – they can dictate where your funds go on the sale of the property (ie, back onto the loan, in most cases), and it becomes virtually impossible to switch lenders to access a better deal.
If one property performs well and the other has a market drop, you’ll struggle to access the equity you accrued because the two properties are valued as one, meaning the lower performer will reduce the overall value of both properties. It’s always better to opt for stand-alone loans.
A key takeaway for any mortgage holder is to use a specialist to help you find the best loan and lender for your circumstances. When you’re talking thousands of dollars in potentially lost money, it’s a good idea to put in the time and effort – not just in the beginning, but throughout the course of the loan – to making sure you’re not making simple but costly mistakes.
