Mortgage traps to avoid
Including tips and tricks to get your mortgage working for you
Mortgage mistakes are nearly always costly, especially as collectively we all owe more mortgage debt than ever before. Here are the top five mortgage traps you should avoid, along with a few tricks to get your mortgage working for you.
1. Forgetting to shop around
Many people make the mistake of using their existing bank and give other options no thought. Just as you would with any other major purchase, when it comes to home loans you need to research your options and shop around for the best deal.
Different lenders offer different rates, features and terms, and many are negotiable depending on your circumstances.
There are no “right answers” when it comes to your lender (bank) though some people prefer New Zealand-owned banks (there are a few left!) as opposed to the major banks – which are all owned by their Australian parents.
2. Fixing a mortgage for too long
Unless there’s a good reason for it, fixing your loan for too many years can be a restriction you don’t need.
Some people think when rates are expected to go up fixing your mortgage rate for as long a period as you can at times is a great idea. Though even at times when most financial commentators and “experts” believe that interest rates will rise, the increases are usually already factored-in to any rates you’ll be offered anyway – 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 in years to come.
Sometimes, banks will offer you a great mortgage rate over a comparatively long period. However, this will cut down your options moving forward, and will nearly certainly mean you’ve lost flexibility – for instance if you receive a bonus or inheritance and want to repay some of your lending. It’ll also be costly if you want to shop around for a better rate during the term of the loan.
3. Not fixing the mortgage at all
Over the last decade or so in New Zealand, mortgage rates have steadily reduced. Over this time, you might think that you’d be better off with a floating rate that takes advantage of this downward trend.
According to Milestone Direct’s own internal analysis, you’d be wrong. Our 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 your mortgage lending on a floating rate will likely cost you. Unless there’s good reason not to, it pays to fix at least a portion of your mortgage.
4. Choosing a loan solely based on interest rate
Your loan’s interest rate is certainly an important thing to consider, but it’s a mistake to think that’s your only deciding factor. Most often, you won’t even know the rate until you’re nearly ready to purchase anyway. In order to ensure you’re getting the right loan to meet your needs you’ll need to take a range of things into account, including:
- How much flexibility is needed with the structure?
- What is the lender’s (usually a bank) customer service like?
- What is the lender’s reputation online?
- Who is your existing banking with?
- How can the loan be best structured repay it quickly?
- What else is on offer? For example, “cash back” which can make minor differences in mortgage rate irrelevant.
5. Getting extra lending to buy things you don’t need
Many people use the lending against their own home to make all kinds of consumer purchases. This could include overseas travel, a better car, or a renovation which could wait. Aside from such purchases not usually being a good idea in the first place, this can cost a lot more than you might think.
People do this because mortgages are secured against a home, so have a much lower interest rate than consumer debts such as credit cards and the type of loan someone might get to buy a car. However, despite the difference in interest rates, spreading those repayments out over the period of a mortgage means they might end up paying even more than if they were repaying a credit card or other high interest debt. For example, let’s say somebody wanted $20,000 to spend lavishly on themselves (though let’s reserve judgement on whether they should or not!), and could either get a short-term loan of five years at 20 percent interest, or borrow against their home at just five percent interest and repay the sum over 20 years. In either case, the total repayments are remarkably similar:
- $31,678 to repay $20,000 at 5% interest over 20 years, or
- $31,793 to repay $20,000 at 20% interest over 5 years.
To test this for yourself, you can input any sums into this repayment calculator.
The bottom line
Let’s recap the top five mortgage traps to be avoided:
- Forgetting to shop around
- Fixing a mortgage for too long
- Not fixing the mortgage at all
- Choosing a loan based solely on interest rate
- Getting extra lending to buy things you don’t need