Do you have a home loan? What sort is it – fixed rate, variable, line of credit, interest only, principle & interest? Maybe you’re applying for a new loan or an extension to the one you already have?
Here are some tips to keep in mind before accepting the till-death-do-us-part terms & conditions your bank will put in front of you.
Borrow what you should, not what you can
Imagine walking into a hamburger shop, looking at the menu and having an idea of what it will take to satisfy your hunger. Now imagine the very polite person behind the counter taking an assessment of the size of your hunger, the size of your mouth, the size of your waist and then making a recommendation to you that you should, indeed you qualify to be able to have three of their deluxe hamburgers along with an extra large box of hot chips plus a super jumbo sized thickshake.
Imagine then being told that they are now going to give you a leaf of lettuce completely free because you are such a valuable customer to them and they really care about you.
What do you do at this point? You’d probably tell them to rack off, right? You and I both know that what you eat has little to do with your capacity to fit it all in, it’s a lot more to do with your actual needs.
Banks want you in debt to them forever. The word mortgage literally stems from the words ‘dead pledge’, you take this stuff out until the day you die.
Why then, are we so accepting of their ‘qualification’ routine, willingly jump through the hoops to get in their club and so gratefully accept their offer of extra finance? Is it all just to have our egos stroked so blissfully and get into the McMansion so we can gloat to the friends who couldn’t really care anyway?
We don’t accept pushy hamburger salespeople and we shouldn’t accept their finance-doppelgangers.
How do you then get what you should and not what you ‘qualify’ for?
What is the term of your servitude?
In the early 1990’s, home loan interest rates in Australia reached record highs of over 20% and today they are at record lows of 2-3% yet we pay more now from our budgets in home loan repayments than ever before. Crazy, right?
This is purely because of the intangible sounding 30-year mortgage so readily offered by banks. Why is it so readily offered? Because when you apply a low interest rate to that oversize menu offering and stretch it over 30 years the repayments come down and all of a sudden it doesn’t seem that bad.
But we have no room to move because we’ve borrowed all we can or more on day 1. You can’t renovate, you can’t extend and your choices to be able to step back from work to study/holiday/travel/write are gone because if you don’t make those repayments then guess who comes knocking? NOT the friendly sales person who got you in this mess that’s for sure!
You now need the value of your home to increase so that you can at least sell and pay out your loan and try to start again OR you can borrow more to get you out of the mess because the bank has told you that this will help you.
I strongly encourage you to aim for a 15 year term on your mortage. This means for every $100,000 you borrow you should be paying $800 per month in repayments.
You can still take a 30 year mortgage but you should make extra repayments so that you are on track to pay it off in half the time, 15 years.
By making a decision based on what you can afford in YEARS, then you will likely be limited to what sort of property you can buy and what location you can buy in.
This is a good thing, purchasing a lower priced property means you need to save up a smaller deposit, pay less stamp duty and will be debt free in half the time.
Do you want to be debt free at age 40 or 55? Do you want to be taking family holidays in amazing locations in your forties or do you want to be still working a second job so you can meet mortgage payments?
Watch out for the marketing hype
Repayments are the most significant factor in paying your home loan out ASAP. Other items such as low interest rates are just the ‘icing on the cake’ for you so whilst it’s important to be aware that your interest rate is in line with current rates it should not be the primary driver of how much you’re borrowing.
Advertisements that show low-fees or loyalty program bonus points quite often don’t show the higher interest rate that goes with it. I’ve seen these advertisements for loans that carry an interest rate that is almost 1% higher than comparative loans without the shiny additions. To illustrate, if your loan is $300,000 then your additional cost just for the first year is $3,000 yet the fee saving or loyalty program bonus won’t even come to $500.
Who is it that they are in business to help?
You still need a loan
It’s nice to think that you don’t need a loan and that you can save for everything you need however in the current economic environment this is not likely to be achievable.
Keep the main points in mind:
- Borrow what you should, not what you can
- Aim for a timeframe that leaves you with choice, not a pledge till death
- Ignore the slick marketing
Taking control of your finances is a simple process but it is rarely easy, approach your decisions slowly and with care and celebrate your future with less financial headaches.