Five Common Mortgage Mistakes
Mortgage adviser Ryan Smuts, of Kris Pedersen Mortgages, often sees clients who aren’t managing their home loans in the most effective way.
11 October 2021
In my role, I talk to a lot of Kiwis who’ve got themselves into strife financially – and it’s usually for the same five reasons. Here are the most common mortgage mistakes we see.
Not shopping around
People often go straight to their own bank for a home loan, rather than comparing products and prices.
The problem with that is, their bank can offer them only one product – their own. Home loan rates vary a lot from bank to bank. Lenders compete for market share so, at certain times, they can be more aggressive with their pricing and also what they’re prepared to offer clients.
Discuss your options with a mortgage adviser. They’ll help you access a larger portion of the market. Use their expertise to get the best deal for you.
Some homeowners structure their loans to pay interest only, rather than interest plus principal. It looks like a cheaper option on the face of it, but there are fish hooks.
Many people don’t realise that an interest-only period actually chews into the loan term itself, and that they’ll need approval to extend an interest-only period.
If you take out a 30-year loan and sit for five years paying interest only, you’ll only have the remaining 25 years to pay off the principal.
The longer you extend those interest-only periods, to another five or 10 years, the shorter the time you have left to repay the principal.
You might get caught out when you’re requesting an extension, because it’s subject to the bank’s approval. If the credit market tightens, it can be harder to get approval.
Sitting on a fixed rate
Often people set and forget their mortgage rates once they’re fixed. In a market like this one, with rates trending down, it’s worthwhile seeing if breaking and re-fixing your mortgage might be right for you.
The cost of the new interest rate plus the break fee may work out better for you than your existing rate, when it’s compared over the remaining fixed term.
Floating for too long
When rates trend downwards, people often sign up for a floating rate and sit and wait for a lower fixed rate. That’s not a great strategy and here’s why.
If you’re floating at 5 per cent for six months while you wait for rates to drop, when you could’ve fixed at, say, 3.55 per cent on a one-year rate, you’d end up paying an extra $725 in interest per NZ$100,000 over that six months.
For you to be better off, the rate when you fix would need to be 0.725 per cent lower than the comparable one-year rate. That’s 3.55 per cent minus 0.725 per cent, which is 2.57 per cent. You’d be lucky to get that.
Having a large credit card limit
Kiwis are often wrongly told that having a big credit card limit helps their credit score. But a big limit can be a problem, when you apply for a mortgage.
Banks calculate how well you can service your home loan. Now, they tend to consider 3 per cent of the total limit of your loan facilities as a monthly expense. That’s even if you pay off your balance each month, and even if you never use your card.
That’s because you might put debts onto that card in the future, so they have to count it as one of your expenses. Be aware of this if the bank’s assessed you and you’re facing ‘affordability issues’. If in doubt, cut your credit limit right down.
Published 15 November 2019
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