As mortgage advisers we often see clients in situations where they have gotten themselves into debt and aren’t always managing things in the most effective ways, and this includes first-home buyers and also property investors.
The most common mortgage mistakes we see are as follows:
- Not shopping around for the best product/price
Clients often tend to go directly to their own bank who can offer them only one product (theirs). Banks come in and out of the mortgage market in terms of their competition for market share, and as a result can be more aggressive in terms of pricing and also how they assess clients, at certain periods. Discussing your options with a competent Mortgage Adviser will allow you to access a larger portion of the market and leverage from their expertise to get what is most suitable for you.
Many clients don’t realize that an interest-only period actually chews into the loan term itself, and also extensions are subject to approval. Basically what this means is that if you take out a 30 year loan and have 5 years interest only, you only have the remaining 25 years to pay off the principal. The longer you extend those interest only periods (perhaps another 5, or 10 years) the shorter the time to repay the principal. In addition, when requesting extension it is subject to approval and when the credit market tightens can be harder to get approved. I would suggest understanding exactly when your interest only period expires (it is different to the fixed rate) so if you aren’t going to have this extended, you’re aware of what your new repayment could be – it could be a lot higher when comparing for example an Interest Only payment to a 15/20 year Principal & Interest payment.
- Fixed Rates (Set and Forget)
Often people set and forget their mortgage rates once they are fixed. In a market like this one with rates trending down, it’s worthwhile seeing if breaking and re-fixing your mortgage is right for you. If the comparable cost of the new interest rate plus the break fee is better for you than your existing rate (compared over the remaining fixed term) then it often makes sense to break and re-fix.
- Floating for Too Long
When rates trend downwards, clients often tend to float while they wait to capture the best rate. If you’re floating at 5% for 6 months while you wait for rates to drop, while you could’ve fixed for 3.55% on a 1 year rate for example, you end up paying an additional $725 in interest per $100k over that 6 month period. That means your rate when you fix needs to be 0.725% lower than the comparable 1 year rate (i.e. 3.55%-0.725%= 2.57%). Unfortunately that’s unlikely.
- Large Credit Card Limits
People are often falsely told that having credit cards (in the NZ market) assists their credit score. While this may be beneficial in some areas – when it comes to mortgages they usually do more harm than good. When I say this I am strictly speaking about serviceability calculations with banks – at the time of writing they tend to take into account 3% of the total limit of your facilities, and load it as a monthly expense – even if they’re paid monthly, and even if you don’t use them! Be aware of this if you’re facing ‘affordability issues’ from the bank’s assessment perspective.