Buying a new home is exhilarating, but choosing the right financing through a home loan can be a daunting prospect. Every lender is different. Every loan is different. The difference between a great deal and a nightmare can be subtle.
Here are the six most common mortgage mistakes homebuyers make and how to avoid them.
- You don’t shop around.
A surprisingly frequent first mistake that a lot of homebuyers make is they don’t shop around. Especially for first-time buyers, the world of mortgages can be overwhelming. It’s tempting to go with a financial institution you use and trust. Here’s the thing: even if your bank account has a phenomenal interest rate, it doesn’t mean a home loan from the same bank will stack up.
On a similar note, when you are shopping around for the right mortgage, don’t stick to the big four Australian banks. There are over 100 lending institutions across the country offering home loans. Often these smaller lenders will offer more attractive interest rates compared to their competitors.
- Interest rates are the only thing you’re weighing.
Obviously, you’ll want to Best find a mortgage with a great interest rate. That being said, an interest rate isn’t the only thing that determines the total cost of the loan. You want to look at the terms of the loan:
- Will the interest rise after an introductory period?
- Are the fees high?
- Can you make extra payments without a penalty?
Also, you want to look at the lender as a whole:
- Does it offer the services you need like online banking or ATMs near you?
- If you want paper statements, will it send them without charging you extra?
- How is the customer service?
Unlike short-term loans, a home loan can be a 30-year commitment. Now is the time to consider whether interacting with their customer service is less fun than going to the dentist.
- You aren’t looking at the comparison rate.
When comparing interest rates, you shouldn’t stop there. An interest rate tells you how much you’ll pay over the life of a loan, but what it doesn’t factor in are the fees or revert rates. The comparison rate can help give you the full picture of a mortgage and whether it’s a good deal for you. Some comparison rates might be very close to their interest rate while others might differ wildly.
A comparison rate that is much higher than the headline interest rate will clue you in to the possibility of high ongoing fees or a revert rate where the interest spikes after an introductory period. These little clues can help you figure out whether this mortgage is a good pick or not.
Sometimes those ‘too good to be true’ interest rates are just that.
Choosing a longer loan term than you absolutely need.
Choosing a 40-year mortgage means you will have lower monthly payments. But it also means that the amount you pay in interest will substantially increase. The difference in a 30-year mortgage and a 40-year mortgage can be over $100,000.
With the costs of real estate in Australia rising, it is important to choose a loan that will not inflate the cost of your new home even further. If you have to stretch your loan out, refinance as soon as possible.
- Consolidating debts into your home loan.
It can be tempting to consolidate credit card debt, personal loans, or car loans into your home loan when you sign the paperwork. It reduces the number of monthly payments down to one and decreases the amount of your paycheck that goes directly toward paying bills. However, consolidating debt will also, of course, increase the size of your home loan and increase the amount of time it will take you to pay off.
As a rule, turning short-term debt into long-term debt means that you will pay more in interest as you pay it off over a longer period of time. It will likely be more expensive to consolidate short-term debt into your home loan than to continue paying it separately.
- You set it and forget it.
While most people outside of the financial sector might not find the idea of browsing through home loans a thrilling prospect, the fact is that the Australian mortgage world is constantly changing. What’s a good deal – and what’s not – is changing all the time. Perhaps one of the most detrimental mistakes you can make in regard to a home loan is to sign papers for a 30-year mortgage and settle in for the long haul.
Chances are, you’re leaving money on the table. Setting a date on your calendar every six months to look into current offerings for mortgages can clue you into great deals other banks are offering.
Keep in mind that your lender wants to keep you as a customer. Financial institutions have entire teams geared toward customer retention. So don’t feel like you can’t call up your bank and ask for a better rate if you’ve found one elsewhere. The implication is that you will leave if your current lender won’t bargain with you.
The caveat here, of course, is that if your bank won’t compromise with you, you need to be ready to follow through and switch lenders.