The most common mortgage mistakes borrowers make and how to avoid them.
Big life events – marriage, children, travel – usually start with big questions. These questions can help us avoid potentially costly mistakes.
Asking questions should always precede borrowing money to buy property, says Aussie mortgage broker Edward Mitchell from Bayside in Victoria.
“The most important thing if you want to avoid mortgage mistakes is first to look at your own circumstances,” Mitchell says. “Are you a first home buyer, refinancing, investing or upgrading? Once you know your borrower type you can then ask ‘what is my goal?’”
The chief executive of the Mortgage & Finance Association of Australia, Siobhan Hayden, says there are hundreds of mortgage products in the market today. “If you can identify which type of borrower you are, your broker can find the most suitable product,” she says.
Let’s look at six common mistakes borrowers repeatedly make.
1. Setting and forgetting
Not regularly reviewing your mortgage or limiting yourself to one lender’s products is a no-no. “People assume you have to be loyal to one bank, which may have five or six products,” says buyer’s agent Cate Bakos of Cate Bakos Property.
“But if you go to a broker, they may have 40 or 50 different products that suit your needs at their disposal. It is very important to regularly ask if your mortgage is still competitive.”
The cost of refinancing can vary depending on the lender but, according to Mitchell, you may be able to recoup this cost over time with a lower interest rate.
2. Choosing a mortgage purely for its interest rate
Home loan interest rates make for pretty exciting reading right now. They’ve reached record lows. But experts stress selecting a mortgage simply because its headline rate undercuts rivals can also have drawbacks.
“It is loan features that should be foremost in people’s minds and how they fit with your personal circumstances,” Mitchell says. “Comparison rates, which take into account any honeymoon rates, discounts, ongoing fees etc, give a far more accurate comparison than looking solely at advertised standard rates.”
3. Scrimping on preparation
Knowledge is power, right? In the mortgage world, add “organised paperwork” to that equation.
The Mortgage & Finance Association of Australia has about 12,100 brokers and feedback confirms applicants who present with organised documentation find the mortgage process smoother and faster, and are more likely to be successful.
“From a self-employed perspective, you do need to keep on top of paperwork and have details of your financials and all the supporting documents ready when sitting down to make a formal application for a mortgage,” Hayden says.
4. Overlooking mortgage structure
Some mortgages come with extras including offset accounts, credit cards, lines of credit and redraw facilities. Some have no frills.
It is important to seek a product and structure – interest and principal or interest-only – most compatible with your unique borrowing position and purpose. Your bank or broker should be able to guide you.
“Wrong structure is also a mistake I often see and tax deductibility can be quickly maximised or obliterated,” Bakos says.
5. Fixing without all the facts
A fixed-term interest rate mortgage can cost you thousands of dollars if you need to break it. If you fix, do it for the right reasons.
Of course fixing your mortgage interest rate will be preferable for those borrowers who seek certainty for budgeting reasons, Mitchell says. “Fixing makes sense for certain borrowers; however, doing it to try to ‘beat the bank’ is not wise; five years fixed is an awfully long time.”
It is important to weigh up whether to fix, split your loan, or to make it variable.
6. Not getting pre-approval
Unless you have a written pre-approval from your lender, don’t assume you have money in the bag when borrowing to purchase property.
“There are many online tools available that generate indicative borrowing figures, but a lot of the things banks want to know before lending formally just do not show-up on those borrowing calculators,” Mitchell says.
“Prospective borrowers often think they can afford property based on these web tools then get into strife when they come to buy, go back to their lender and find they cannot secure the finance.”
Have you made a mortgage mistake you think others should avoid? Tell us in the comments below.