Five mortgage mistakes to avoid when you buy property
Finding a mortgage that appropriately reflects your situation takes more than just finding the lowest interest rate.
Ben Kingsley, managing director of Empower Wealth and co-host of The Property Couch podcast, gave Money the inside scoop on some of the important, but less-appreciated, mortgage traps people fall into.
1. Cross-securitisation of multiple properties
Also called cross-collateralisation, it's when a lender uses the collateral from one loan to secure another.
Let's say you have three properties. Two have gone up in value and one has gone backwards. The one that's gone backwards will impact the loan to value ratio and potentially impact the amount you'll have to lend against the equity in the property.
"It's very common for the banks to want to cross-securitise to give them greater protection, but it's not in your best interest; your best interest is to have each property separate, and have the appropriate loan splits secured against those properties as required."
"What you want to do is basically say 'if I want to buy that property with 105% interest, then take 25% from my existing property, and do an 80% loan against the new property.' So the two loans are still deductible, but they're not cross-securitised."
Aside from its potential impact to the loan to value to value ratio, cross-securitisation can quickly become a headache when it comes time to sell one of the properties.
2. Overlooking lenders mortgage insurance
Chances are you'll be paying lenders mortgage insurance (LMI) if the area you want to buy in is appreciating in value quicker at a quicker rate than you can save, says Kingsley.
"If the market's moving, get in. If it's not moving then keep saving and reduce your LMI premium."
In addition, LMI amounts are different between lenders; there's no set industry standard.
You may be seduced by a cheap online rate, but you could ultimately be paying thousands more for the loan than you otherwise would've by going for a loan with a slightly higher interest rate and lower LMI.
LMI typically gets more expensive the more the loan to value ratio goes up. For this reason, the big banks often have much cheaper lenders mortgage insurance premiums than the small banks do.
"Novice players get seduced by a cheap interest rate, but they end up paying thousands more due to lenders mortgage insurance."
3. Introductory rates
The introductory, or honeymoon rate, is pitched to you as a sales point to make repayments cheaper in the first stages of repaying the loan, but it usually reverts to a much higher standard variable rate after one to two years.
"It's important to calculate your costs over a five year period, not over the first couple of years. Five years will give you a true indication of your true borrowing cost, because after that time you're in the market to refinance."
4. Shop around
Don't apply for a mortgage with your current bank just because it seems like the easy way to go. These days, it's easy to switch your banking, so why not shop around for the best deal.
"Consumers assume their current bank will look after them, but the reality is they may not be," he says.
Mortgage brokers can take the pain and work out of shopping around. They will also soon be required by law to act in the best interests of customers, once the amended Credit Act passes through parliament.
"The banks and lenders don't have the best interest duty because they can't - they only have a mortgage to sell you - whereas the broker must act in your best interest."
5. Go for a mortgage offset
Offset mortgages are 'offset' against savings accounts. So you will pay interest on the mortgage less the amount in your savings account. The interest is calculated every night - and saved every night.
"While a basic loan has fortnightly or weekly repayments, you'll get charged higher interest. By comparison, the balance in the offset account reduces the interest build every day."