5 THINGS MOST PEOPLE DON’T KNOW ABOUT THEIR MORTGAGE
Choosing the right home loan is not just about getting the cheapest rates. There are other crucial things that home buyers and property investors need to know first about their mortgage.
Unfortunately, most people don’t understand the potential costs of fixing rates, the ins and outs of a loan contract and what it really means for their parents to act as guarantors.
We’ve listed the top 5 things most people don’t know about their mortgage, but should.
1) CHOOSING THE CHEAPEST INTEREST RATE DOESN’T GUARANTEE THE CHEAPEST LOAN
Tim Wong is the Finance Manager for Zinger Finance. He says, it is common for borrowers to choose lenders based on whether they offer the cheapest rates.
“It’s not really all about rates,” he says. For example, while one bank may offer the cheapest rates, they may also have the tightest policy on releasing equity. It is important to look beyond rates and see the whole deal that is being offered.
Choosing the cheapest rate can actually be a pointless exercise. Tim says, over the course of your loan, rates are likely to change. If you have taken out a 30-year loan, it is unlikely your interest rate will continue to be the cheapest in one year’s time, let alone 10, 20 or 30 years!
In fact, if you want to have the cheapest interest rate throughout the course of your loan, you would probably end up having to review your loan as regularly as lenders change their rates.
2) FIXING INTEREST RATES CAN COST YOU MORE.
Tim says, “A lot of people don’t understand the pros and cons of having a fixed rate.”
He says, fixing rates is a big decision that needs to be well thought out and never rushed into.
Here are some things to consider:
• When you fix rates, you are entering into a contract that could potentially cost more to break in terms of exit fees, than it would cost to pay the variable rate instead.
• Although you are locked into the contract, the lender has the ability to change their credit policies in a way that is unfavourable to your goals and situation.
• When the fixed rate term ends, your loan will likely roll over to the standard variable rate anyway.
• If you have married a fixed rate term with an interest only period, you could be hit double with the extra cost of the variable rate and the addition of principal plus interest repayments at the end of your fixed period.
• In some cases, it may be beneficial to fix rates. “Everyone’s situation is different,” says Tim. Speaking with a good broker can help you decide whether or not to fix.
3) YOUR BANK’S LOAN PRODUCTS MAY NOT BE THE BEST
Many people will go straight to their usual lender when they need finance. It is common for borrowers to visit whatever bank they have a transaction account with in order to get a loan.
Other banks may have loan products and credit policies that are better suited to your needs and financial goals. Sticking with your usual lender may hold you back on your journey.
One advantage of using a broker, says Tim, is that they can compare several different policies and loan products across the board to find the most appropriate one for your situation.
For example, if you would like to revalue your property down the track in order to take out equity for another purchase, a good broker will be able to tell you what type of valuations each lender favours. They should also know how soon and how often you can order a valuation. This can help you find the best lender for your needs.
4) IT IS IMPORTANT TO UNDERSTAND YOUR LOAN CONTRACT
It sounds like common sense, but according to Tim, a lot of borrowers don’t understand the terms and conditions set out in their loan contract.
Some borrowers don’t even keep a copy of the document.
He says, a lot of people know the loan amount and rates, but aren’t aware of when the loan will expire.
He says, it is important to understand what you have committed yourself to.
If you have entered into an interest only term, you need to know when that will expire so you can plan whether or not to roll it over, says Tim.
If you are applying for more finance, your lender will want to know how many years you have left on interest only repayments for your existing loan.
Tim says it is important to keep a copy of your loan contract. If you don’t understand it, it is advisable to run it past an expert and ask them to explain it to you.
5) HOW YOUR LOAN IS SECURED CAN HAVE IMPLICATIONS ON YOUR FUTURE FINANCE
According to Tim, many people don’t understand the knock on effects of how their loan is secured.
Taking a ‘security’ is a way of the banks protecting themselves against the risk of the borrower not repaying their loan. A lender can take security over anything it sees as having value, but it is often a property. They may seek to protect their risk position further by way of having a guarantor (such as a parent) put up additional security.
Without realising it, lenders may have cross-secured a borrower’s assets, such as their personal home against an investment property. This describes when two or more properties are used as security over the same debt and can also help strengthen the lender’s position.
This could affect their ability to borrow more down the track. For example if one of the properties has negative equity, this will detract from the overall equity position of the other property, meaning this equity can’t be used for further investment.
In the case of using a guarantor to secure a loan, many borrowers do not understand the implications that this decision can bring.
First and foremost, the person acting as guarantor will be responsible for making loan repayments if the borrower goes belly-up.
But even if this isn’t the case, the guarantors borrowing ability will be reduced when they apply for a loan. This is because the banks view the debt that someone is guarantor for as a personal potential responsibility.
Secondly, if the borrower wants to change or increase their loan at any time, the guarantor will need to agree to and sign off on the changes.
So, if the borrower wanted to take out further finance in order to buy a new car, for example, and the guarantor didn’t agree with this plan, the borrower would not be able to access those further funds.
It can be extremely difficult to remove a guarantor from a loan agreement. In the worst case you may fall out with someone, however, you will still be required to cover their repayments. If you refuse, your credit history will be negatively affected.
So, while many people will use a guarantor just to get the loan in the first place, it is important to remember that the guarantor is in it for the long run – not just in the approval stage.
LOOK AT THE BACK END
In order to be in the driver’s seat of your investing, it is important to understand your financial commitments. Going through a good broker can help you identify the most important aspects of the loan/s you require, as well as the terms and conditions you will be implicated in.
So, look beyond interest rates, examine credit policies and chat with your broker about the best way forward for you.