Please use the menu below to navigate to any article section:
Mortgages – even the word sounds a little scary, doesn’t it?
But it doesn’t have to be, as long as you understand what mortgages are and what they are not.
The thing is far too many investors chase the cheapest interest rates.
But mortgages are much more than just their interest component.
In fact, there are other elements which it pays to get right… long before you’ve signed on the dotted line.
1. You must understand your loan contract
It sounds like common sense, but a lot of borrowers don’t understand the terms and conditions set out in their loan contract.
What’s even scarier is that some borrowers don’t even keep a copy of the document!
While most people know the loan amount and rates, they aren’t aware of when the loan will expire.
Let me be clear: it’s vitally important to understand what you have committed yourself to.
If you have entered into an interest-only term, for example, you need to know when it will expire.
This is especially true in the current lending landscape, where some lenders are reluctant to let investors continually roll one interest-only loan term into another.
In fact, some are requiring investors to start paying principal and interest repayments instead.
2. The cheapest rate isn’t necessarily the cheapest loan
Unfortunately it’s common for borrowers to choose lenders based on whether they offer the cheapest rates.
But, it’s not really all about the rate.
While one bank may offer the cheapest rates, they may also have the tightest policy on releasing equity.
That’s why it’s important to look beyond rates and see the whole deal that is being offered.
And… the fact is that choosing the cheapest rate is actually a pointless exercise!
That’s because over the course of your loan, rates will 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 in 10, 20 or 30 years!
3. Fixing your rate can cost you more
Fixing your mortgage’s interest rate might seem like a good idea at the time but it will often end up costing you money.
That’s because the bank generally know more about the future direction of rates than you do!
So what you’re actually doing is betting against the bank on who knows more about the future of monetary policy.
Sounds a little absurd, doesn’t it?
But, if you are considering fixing all or part of your mortgage because sometimes it makes sense, you need to consider issues such as:
- When you fix rates, you’re 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’s unfavourable to your goals and situation.
- When the fixed rate term ends, your loan will likely roll over to the standard variable rate anyway.
While in some cases it may be beneficial to fix rates because everyone’s situation is different, speaking with a professional can help you decide whether or not to fix.
4. Your current bank may not offer the best loan product
Humans are creatures of habit so many people will go straight to their usual bank when they need finance.
It’s all-too-common for borrowers to visit whatever bank they have a transaction account with in order to get a loan.
But just because you’ve been saving money with that bank since you were a teenager, doesn’t mean it will have the best loan products for your current circumstances.
In fact, it’s highly unlikely it is the best choice for you.
Other banks may have loan products and credit policies that are better suited to your needs and financial goals.
Plus sticking with your usual lender may hold you back on your journey!
The key is to research what’s on offer, or use a mortgage broker, so you can compare a number of different policies and loan products to find the most appropriate one for you.
Think small, not big
So, before you sign up for a mortgage, you have to think small and not big!
I know what you’re probably thinking: Isn’t that the wrong way around?
No, it’s not!
What I mean is that you have to understand all of the “small” details in in your mortgage and not get distracted by the “big” dream of buying a home or your next investment property.
That way you can remain in the investment driver’s seat from the outset.
So, you must look beyond interest rates, examine credit policies, and chat with a professional who can you can help you discover the best way forward for you.
That way, you will be in charge of your mortgage instead of your mortgage having control over you.
Subscribe & don’t miss a single episode of Michael Yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to Michael Yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.