1. Making a Major Career Change
Your length of employment and security of income are important factors that a lender will look at when deciding whether to lend you money. They will want to be certain that you are able to comfortably afford your monthly mortgage payments into the foreseeable future.
If you are an employee a lender wants to be sure you are not in a probationary period and your role, income, commission or allowances are stable and consistent. But, if you suddenly decide to tell your boss where to go and change jobs or go out on your own and start a business, it could hinder you borrowing money for many years. If you have itchy feet or are thinking of making a change in your field of employment, wait until you have discussed your mortgage options first. Make a plan with your broker to ensure whatever you do
2. Planning on sticking with the same mortgage until the end
The mortgage market changes so rapidly and your Home loans can become uncompetitive within only a few years, or less.
For starters, it pays to check your lender hasn’t jacked up the rate of your loan and is no longer competitive.
Competition improves loan features for new to bank borrowers and you might be missing out on benefits if you stick with the same loan to too long.
You should check your loan remains the best option a minimum of every 2 years. It costs nothing (but some of your time) to check if there is a better deal. And that time can save you thousands of dollars a year.
3. You set your loan term as long as possible
Reducing your loan term just a few years can take $100,000’s off the cost of the average loan.
It’s not always the best strategy to go for the longest loan period possible. Paying a little more off your loan each month can make you significantly more wealthily over the long-term, or at least debt free earlier. You should look at the opportunities presented by a shorter mortgage, such as the ability to focus on your kids’ education once you’re debt free.
Your lender and mortgage broker want you to take out a 25 – 30 year loan as they are being paid interest and trailing commission for the entire time. The longer the loan the more money your lender and broker make.
And using a mortgage offset is not always the best strategy for some people, as the easy access to funds presents a temptation to spend the cash (a redraw facility adds an additional layer of admin and gives access to funds if needed). Always get financial advice with your mortgage advice.
Read this article for more information on how loan terms affect your wealth.
4. You used personal rather than professional reasons for
choosing your mortgage broker
Not all mortgage brokers are the same. I’d say almost 100% of people have no idea if they got the best mortgage available; and yet are happy to recommend their broker to their friends (let’s face it, usually because they ‘like’ them personally).
So don’t decide to use a broker simply because your mate is one, or recommends theirs because they ‘got a good rate’. Unless you happen to know an independent mortgage broker, if you use anyone else, you are using one of the 99.99% of compromised and biased brokers in Australia. And, this means you’re giving away $10,000’s of your hard earned cash in the form of commission over the life of your loan. And you may not get the best loan (and therefore pay more in interest and ongoing costs as well).
Everyone wants to support friends and family – and use people they recommend. Just keep this article in mind when you decide to give your business (and hard earned cash) to someone you know or a broker referred by a friend without a professional basis.
To be fair to many mortgage brokers, most are not aware of the inherent conflicts and costs associated with their profession (although most don’t ask or think about it critically). Brokers are taught by their employers, who make billions out of their associations with a hand full of lenders.
5. You didn’t get pre-qualified before purchasing or going to an auction
It's very important to pre-qualify for a mortgage before you start the formal shopping process. By doing this, you can get an idea of what kind of home you can afford and what the monthly payment will look like.
Getting pre-approved takes this a step further. It's good to get an idea of the loan you can get, and when your credit is in order and you're ready to start the process, getting pre-approved will give you a much more accurate estimate of how much the bank will actually lend you. Here's more on getting pre-approved for a mortgage.
Also, keep in mind that the amount the bank will lend you may not be exactly aligned with what you can afford.
6. You fell for cheap tricks with rate comparisons
You should almost never pay the Standard Variable Rate (SVR). Each lender’s SVR will vary with others – it is the basis by which your interest rate is determined but not the final rate you are likely to pay. Some banks have higher SVR and so will discount theirs by more to reach the ultimate rate you will pay. Some have lower SVR and so will only apply a small discount.
Therefore, comparing the SVR across lenders does not help you work out which loan is cheapest.
2 tricks to look out for:
A lender comparing their lowest interest rate with the SVR of other lenders – rates you would never pay if you used those companies.
Showing a large discount off their SVR to make you think you are getting a great deal. A big discount off a high price still costs more than a small discount off a lower price.
7. You focused too much on interest rate
Interest rate is only one factor that influences the total cost of your loan. Going with the lender that offers the best initial interest rate doesn’t mean you have the cheapest loan.
Interest rates can change soon after your loan starts and you can quickly end up with a very uncompetitive and expensive rate. In addition, there are other costs that can make a loan significantly more expensive than it seems, based on the interest rate alone.
Fees might include:
– Application fees
– Valuation fees
– Establishment fees
– Legal and settlement fees
– Rate lock fees
– Lenders mortgage insurance
– Early payout fees (deferred establishment fees)
– Discharge fees
8. You didn’t set up your loan with the right features
There are loan features that you might need now or down the track, such as an offset account or the ability to top up. These features do not have to make your loan more expensive, regardless of what an individual lender might tell you. It’s important to design a loan based on your needs now and in the future.
This is why independent mortgage advice, combined with the assistance of your financial planner, is so important.
9. You went direct to the lender
Lenders love it when you walk in their doors without being referred by a broker, as they can pocket the commission they would normally have to give the broker. Lenders save by you going direct, not you.
If you deal directly with your bank, you will waste the opportunity to ask a mortgage broker for more broad advice (beyond one lender’s products) and you will never get any commission refunded.
In addition, there are some lenders who do not deal with brokers (or pay commission) and therefore promote cheaper loans. An independent mortgage broker can recommended one of these lenders, as they do not get paid via commission anyway (a traditional commission-based broker will never recommend one of these lenders).