These 7 mistakes can cost you thousands of dollars over the life of a loan. If you are unsure of anything or need advice to avoid these mistakes please contact me and we will ensure you are on the right path.
1.Paying too much Lenders Mortgage Insurance (LMI)
This is an insurance to protect Lenders against borrowers defaulting on their loans. This insurance will kick in when the Loan to Value (LVR) ratio is greater than 80%. In other words, if you cannot put forward at least a 20% deposit then this insurance will apply.
The amount of insurance payable changes in two different ways. That is either the size of the loan or the LVR%. An example of this is where someone only has a 5% deposit and want to borrow around $330,000. The insurance payable in this case is around 3% or nearly $10,000 as a one off charge.
It is important to note that different Lenders set their own premiums and use various tiers in calculating this insurance.
And one more issue with LMI. Be careful when using more than one property as security to a new home and/or investors loan. If your LVR is greater than 80% then you will pay insurance on the whole loan. This could mean you are out of pocket in the thousands.
2. People Chasing Best Interest Rates of the Day
With the current Lending market so fluid with new and various products the ‘interest rate’ is only part of the whole equation. What might be the lowest interest rate one day may not be the next.
It is important that whatever loan you choose it meets your needs and objectives first and foremost. Lenders fees and charges do vary and can change from time to time. These factors and more are used determine the most suitable loan for you.
All of our clients are provided with an annual review for this reason.
3. Not Shopping Around
In today’s market it is paramount you shop around. You may have 10 different Lenders who all have differing ‘borrowing power’ outcomes. This means that simple things like income and expenses are treated differently.
One bank might lend you $450,000 whilst another may lend up to $600,000. This could be the difference in whether you purchase your dream home or not.
One of the advantages that we have is the access to many lenders and their products. We can ascertain who has the best deal at that time and can even negotiate further.
4. Being Enticed by Short Term Interest Rates
This enticement is almost always targeted to First Home Buyers through ‘Honeymoon’ rates. The attractiveness is the lower repayments during the initial stages of the loan so they can purchase more ‘homely’ items early on.
One of the major pitfalls in this strategy is that after this ‘honeymoon’ period has elapsed it often reverts to a higher rate which in many cases is higher than life of loan discounts.
Statistical data shows that most people retain their first home loan on average between 4-5 years before re-financing. So it makes sense that when you make a decision as big as this you take into account the overall costs for a period of let’s say 5 years rather than the 1 year ‘Honeymoon’ rate period.
5. Don’t make your Home Loan a Prison Term
In days gone by many people would commence a home loan with one lender and some 25-30 years later still be with that same lender. (And this applied to employment too!!)
Now in the 21st Century times have changed. People no longer stay with the one employer throughout their careers and likewise many people no longer stay with the one lender.
Often people will refinance for personal use, to invest in other assets or to chase a better product. Whatever the reason it is prudent to analyse the hidden costs etc. in making these changes.
Our business is to ensure you are aware of all costs in switching and to ascertain the overall benefits to you.
6. Failing to look at the Big Picture
The Home Loan is only one part of your financial landscape. Some people like having a loan with one lender and all other saving accounts and credit cards with another. And for investors with larger portfolios they may have loans with a number of lenders.
The key here in the time poor world we live in today is ‘automation’. With access to internet services bills can be paid on line, money transferred between accounts, direct debits created etc. The more you can automate the more time savings you achieve.
So it is really worth looking at your loan as part of the bigger financial picture to really get great benefits.
7. Choosing the wrong Loan Strategy and Structure
This is probably the most important point to remember. To get it right from the beginning will ensure you maximise your savings and reduce unnecessary costs in the future.
Here is just one example where the loan wasn’t set up correctly.
A Borrower was concerned with rising interest rates and therefore decided to fix the interest rate on his loan from Day 1. He thought he was on a winner here when after 12 months he had emerged unscathed from 3 rate rises.
Shortly after this period he received a significant inheritance, which he knew was coming prior to setting up his loan. He wanted to use most of this to reduce the balance on his loan.
His first problem was because the loan was on a fixed rate option, he was capped as to how much could be invested without suffering any penalties. And the penalties were quite steep.
So he had two basic options. He could pay the penalty and move forward OR he could invest the proceeds into a term deposit/interest savings account. If he takes the latter option and invests in a term deposit/interest savings account he will be required to pay tax on the income.
Either way he will suffer some financial loss simply because the loan wasn’t structured correctly from Day 1.
Now, this is an extreme case but you can see how important it is to get the structure right from the very beginning. Seeking professional advice is one way to avoid these pitfalls.