Mistakes to avoid when you’ve got a mortgage
The top 6 mistakes to avoid if you’ve already got a mortgage
Mortgage mistakes can be costly – if not now, in the future. For all of us who already have a mortgage, here are the top six mortgage traps we should avoid, along with a few tips of what we can do instead.
1. Getting extra lending to buy things you don’t need
As we repay the loan on our home, and as property prices increase, it’s natural for us to start feeling wealthier. We may even have a chat with our banker, who could suggest we obtain some extra borrowing – i.e. increase our mortgage – to spend on something like; renovations, a holiday, a new car, or something else. Despite the temptation, this is generally the last thing we should do!
This is mainly because doing this can cost a lot more than we first might think, as mortgage repayments are spread across such a long timeframe, even if they usually come with today’s low interest rates.
Even if it wasn’t that costly, taking on extra debt can also leave us more vulnerable to the next economic shock or issue we face in life, let alone reduce our chances of achieving other major goals, such retiring as soon as we might like!
2. Forgetting to shop around
Many of us become strangely loyal to our bank, not realising that NZ banks often clamber over each other to obtain new customers – including “poaching” business from each other when our fixed term mortgages expire.
Changing banks at such a time is commonly called a refinance, which is usually performed to make savings and obtain an overall better deal. This isn’t just about the interest rate either, as banks will often offer an upfront payment to “poached” customers called a mortgage cash back.
3. Fixing a mortgage for too long
Unless there’s a good reason too, fixing all or part of a home loan for too many years can be a restriction we just don’t need. Banks often love this because it can tie us to one lender (bank) unnecessarily and stop us from shopping around at all. It will nearly always cost us our flexibility – for instance if we receive a bonus, inheritance, or other windfall, and want to repay some of the lending.
Some of us might logically think when rates are expected to go up, that fixing our mortgage rate for as long a period as possible is a great idea. At times when most financial commentators and “experts” believe that interest rates will rise, the increases are usually already factored-in to any rates we’ll be offered anyway – we need to keep in mind that banks and other lenders do this every day, so have teams of people studying such things and ensuring the rates they offer will still make the bank money for many years to come.
4. Not fixing the mortgage at all
Over the last decade or so in New Zealand, mortgage rates have steadily reduced. Over this time, some might think that you’d be better off with a floating rate that takes advantage of this downward trend.
Milestone Direct’s research indicates that over this period the best-off have been those who kept re-fixing at a one-year rate, which is usually lower than the floating rate on offer.
While it’s impossible to know what the future might hold, leaving all of a mortgage on a floating rate will likely cost us. Unless there’s good reason not to, it pays to fix at least a portion of mortgage debt.
5. Slipping into a rut
For most of us, buying a home is a major life event.
Though once we’ve achieved this important milestone, it can be all-to-easy to fall into the trap of steadily making our minimum mortgage repayments, and nothing more. This can be even as our career progresses and we get paid more, and as NZ interest rates have steadily fallen over the last 10-plus years. Rather than staying in the rut of regular repayments and nothing more, another approach we can take is to reevaluate this annually, and take the time to ask ourselves questions such as:
- Can we repay more? – perhaps in a lump sum or with a higher regular payment? (Note: this depends on our individual situation, as some of us might want to sacrifice a little more now to get ahead earlier in life, while some others among us might place a greater priority on balancing existing lifestyle with longer-term aspirations).
- If we find we have money left over each month or pay cycle, could this be accessibly invested somewhere else instead?
- Or perhaps even: have we built enough equity in our home to leverage off of it, and buy a second property as a rental investment? Learn more about when to become a property investor.
6. Listening to barbeque mortgage advice
From time to time, we’re all guilty of giving someone else’s opinions more influence than we should – often this is the sort of wisdom that’s passed on at a family member’s or friend’s barbeque!
However well-intentioned such amateur tips are, they can be terribly costly. A mortgage is the biggest financial arrangement most of us ever enter into, so talking to a pro in this area is a no-brainer. Best of all, it’s usually free. If you’d like to enjoy a complimentary and no-obligation chat with a mortgage adviser (broker) then scroll down and leave your details below.
The bottom line
Let’s recap the top six mortgage traps to be avoided:
- Getting extra lending to buy things you don’t need
- Forgetting to shop around
- Fixing a mortgage for too long
- Not fixing the mortgage at all
- Slipping into a rut
- Listening to barbeque mortgage advice