In this chapter, we continue our journey of navigating the complex landscape of home financing with greater clarity and confidence. By exploring practical mortgage tips and tricks, you’ll gain the insights needed to understand the nuances of mortgages and feel empowered to make informed decisions about one of the most significant investments of your life.
In the first half of this chapter, we work through some proactive approaches to sidestepping the traps and pitfalls that can sometimes be encountered in the mortgage process. Then, in the second half of the chapter, we look at some key ways that may help you to pay off your mortgage faster.
20 Mortgage Pitfalls to Avoid
From deciphering intricate terms to sidestepping potential financial hazards, this section is designed to help you navigate the mortgage world with more confidence.
Here are twenty common pitfalls to watch out for:
1. Ignoring upfront costs
As you discovered in the previous chapter, securing a mortgage loan often comes with fees and charges, such as mortgage discharge fees (in the case of refinance), application fees, valuation fees and legal fees. Failing to factor in these costs can have an impact on your financial situation.
As a reminder, here are some of the common costs (per loan) involved in a refinance (please note these are approximate figures):
- Mortgage discharge fee: approximately $350
- Set-up/application fee (not every lender charges a fee): This can range anywhere from $0 to $600
- Title registration fee: approximately $200
- PEXA fee: approximately $50
And here are some of the common costs (per loan) involved in a property purchase (please note these are approximate figures):
- Stamp duty: This is calculated as a percentage based on the property’s value and varies between states
- Set-up/application fee (not every lender charges a fee): This can range anywhere from $0 to $600
- Transfer fees and registration fees: These fees encompass various administrative tasks, including mortgage registration and transfer of land, typically dependent on the property’s value
- PEXA fee: approximately $50
- Solicitor/conveyancer fee: approximately $2,000
- Valuation fee: approximately $100 to $400
2. Focusing solely on interest rates
While interest rates are important, they shouldn’t be the sole determinant for refinancing.
Consider other aspects like loan terms, repayment options, product features and fees.
3. Not assessing long-term costs
Particularly relevant to a refinance, spreading your loan out to a maximum 30-year loan term and lowering monthly payments may seem appealing, but extending the loan term can lead to paying more interest over time. Analyse the long-term costs before refinancing – or have your broker do this for you.
4. Inadequate research
Failing to shop around and compare different lenders and loan products can result in missing out on more favourable mortgage options and finding a lending solution that is within your best interests. You mitigate this by utilising the services of a mortgage broker!
5. Insufficient equity
Lenders generally require a certain amount of equity in your property to approve a refinance to satisfy their risk appetite.
They consider a loan-to-value ratio (LVR) > 80% more risky, so may require you to pay lenders mortgage insurance (LMI).
Remember that LVR is calculated by dividing the loan amount by the lender-assessed value of the property – expressed as a percentage.
6. Poor credit history
Your credit history and score play a significant role in refinancing. If your credit has deteriorated since taking out the original loan, it may impact your ability to refinance or result in less favourable loan terms.
7. Not considering your future plans
Refinancing may not be suitable if you plan to sell your property or make significant changes in the near future. Assess how refinancing aligns with your long-term goals.
8. Falling for teaser/intro/honeymoon rates
Some smaller lenders may offer attractive introductory rates that could potentially increase significantly over time. Ensure you understand the terms and potential rate changes before committing to a refinance.
9. Overlooking exit fees
Check if your existing loan has any exit fees or early repayment penalties – particularly if you are on a fixed rate. These fees can eat into the potential benefits from refinancing.
10. Neglecting to read the fine print
Thoroughly review all the terms and conditions of the new loan to avoid surprises, and ensure you understand the implications. Or you can have your mortgage broker walk through this with you. For more practical guidance before committing, you can also read our ‘Must-Know’ Home Loan Tips Before Signing on the Dotted Line.
11. Relying solely on online calculators
While online calculators can provide estimates, they may not consider all the variables. Consult with a mortgage broker or financial adviser for a more accurate assessment.
12. Not considering your financial situation
Ensure that refinancing aligns with your overall financial goals and capabilities. Taking on more debt or extending the loan term may not be advisable for everyone.
13. Omitting documentation requirements
Be prepared to provide all necessary documentation, including income verification and bank statements, to avoid delays in the refinance process.
14. Neglecting to factor in potential economic changes
Interest rates and market conditions can change over time. Consider how potential economic shifts may impact your refinanced loan in the future.
15. Forgetting about mortgage insurance in your calculations
If your loan-to-value ratio (LVR) is above a certain threshold (80% in most instances), you may be required to pay lenders mortgage insurance (LMI) on the new loan, which can add significant costs.
16. Not seeking professional advice
Consulting with a mortgage broker or financial adviser can help you navigate the refinancing process, understand the implications, and identify potential pitfalls.
17. Taking on unnecessary risks
Some refinancing options, such as switching from a fixed-rate to a variable-rate loan, may carry additional risks. Assess if the potential benefits outweigh the associated risks.
18. Rushing the decision-making process
Refinancing is a significant financial decision. Take the time to evaluate all options, crunch the numbers, and consider the potential long-term consequences before proceeding.
19. Not considering loan features
Different loan products offer various features like offset accounts or redraw facilities. Evaluate if these features align with your financial needs and goals as some features have higher rates and/or costs associated with them.
20. Not reassessing your budget
Keeping on top of your budget is key as you don’t want any surprises along the way! By understanding key concepts, leveraging professional advice and implementing proactive strategies, you can more confidently navigate the mortgage process and avoid common traps and pitfalls. For additional insights, you can explore these Expert Tips for Managing Your Home Mortgage.
Remember, a well-informed approach is the cornerstone of securing a mortgage that not only meets your current needs, but also aligns with your long-term financial aspirations.
6 Reasons to Pay Off Your Mortgage Early
Paying down your mortgage ahead of schedule is a goal that many homeowners aspire to. As the market evolves, it’s also smart to stay updated on strategies for the future, such as these insights on how to prepare for the best mortgage in 2025.
1. Interest savings
The longer you take to repay your mortgage, the more interest accrues over time.
By paying it off early, you may significantly reduce the amount of interest you pay over the life of the loan.
2. Financial freedom
A mortgage-free existence can offer many benefits, including the potential for increased cashflow once the mortgage is paid off and you no longer have mortgage repayments to factor into your budget.
This financial flexibility may enable you to pursue other ventures or invest in your future. It would be worth speaking to a financial professional for more advice in regards to this.
3. Peace of mind
Owning your home outright can potentially alleviate the stress associated with mortgage debt.
The threat of foreclosure or the risk of losing your home during challenging times can weigh heavily on some people.
4. Building equity
Home equity is a valuable asset that can potentially serve as a safety net during emergencies or be leveraged for other investment opportunities.
5. Retirement planning
A mortgage-free retirement can provide opportunities to allocate more funds to your retirement savings, which potentially results in a more comfortable post-work life.a
6. Achieving life goals
Liberating yourself from mortgage debt has the potential to open up opportunities to pursue other dreams, whether it’s travelling the world, starting a business, or supporting your children’s education.
6 Strategies That May Help You Achieve This
A mortgage represents a substantial financial commitment, but, with the right strategies, you can potentially liberate yourself from the burden of monthly payments sooner than you might think.
Here are six strategies that may help you achieve early loan repayment.
1. Switch to fortnightly payments
Consider switching from monthly to fortnightly payments. This strategy results in extra payments each year, effectively shortening the loan term and reducing interest costs over the life of the loan.
2. Make lump-sum payments
Windfalls, tax refunds or unexpected financial gains can be directed towards making lump-sum payments on your mortgage. These additional payments can potentially reduce the principal balance and interest paid over time.
3. Refinance to a shorter-term loan
If you have room in your budget, refinancing to a shorter-term loan can accelerate your repayment schedule. While monthly payments may increase, the overall interest savings can be substantial.
4. Make extra payments
Whenever possible, allocate additional funds towards your principal balance. Even modest extra payments can compound over time, expediting the payoff process.
5. Cut unnecessary expenses
Review your monthly expenses and identify areas where you can trim unnecessary spending. Redirect the savings towards your mortgage payments to accelerate repayment.
6. Consider downsizing
If your current home exceeds your needs, downsizing to a smaller property could allow you to pay off your mortgage with the proceeds from the sale of the initial property.
Armed with these six strategies, you can start crafting a personalised plan to pay off your mortgage early. Begin by assessing your financial situation, setting clear objectives and establishing a budget (all outlined in Chapter 2, if you need a refresher).
Determine the amount you can comfortably allocate towards your mortgage each month and implement one or more of the tactics outlined in this section.
Remember, paying off your mortgage ahead of schedule demands discipline and commitment. However, the long-term rewards far outweigh the effort invested. Envision the freedom of a mortgage-free existence and the many opportunities that may await you once you can attain this significant financial milestone.
While the journey to a debt-free life may pose challenges, with determination and prudent financial decisions, you’ll be well on your way to owning your home outright, potentially securing a brighter future for yourself and your loved ones.
In the final chapter, I share some incredible success stories of women who have taken control of their financial narrative, albeit in different ways.
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