The five big mortgage mistakes you could be making on your loan

Mortgage deals have never been cheaper but it’s easy to get stuck on dud offers where you end up paying more. THE FIVE MISTAKES YOU COULD BE MAKING ON YOUR LOAN.

MORE mortgage cuts are on the horizon and they will bring borrowing costs down further.

Many lenders are dishing out mortgage rates under 3 per cent, but complacent customers could easily be getting ripped off.

Here are five mistakes home loan customers could be making without even realising.

1. PAYING A RATE ABOVE 3.25 PER CENT

Borrowers have experienced three cash rate cuts in 2019.

With more predicted to come as early as next month, it doesn’t mean banks pass them on in full and it is hard for borrowers to know what is a good deal.

For owner occupier borrowers paying principal and interest, Mortgage Choice broker Deslie Taylor said aim for a rate close to 3 per cent.

“Right now with the latest rate cut you shouldn’t be paying more than 3.25 per cent,” she said.

“For my clients before we even look at refinancing to another bank we approach their existing lender to get some pricing and see what they offer.”

Many lenders, particularly smaller banks, are offering fixed and variable rate loans with a “2” in front.

Banks rely on inertia, so if you don’t know the deal you are on, chances are you’ve been left
getting gouged.

2. Using redraw like an ATM - paying a rate above 3.25 per cent

Many mortgages come with an offset or redraw facility, allowing customers to dip in and out of their loans like they are an ATM. However, this slows downs a customer’s ability to pay off
the debt.

An offset account is a daily transaction account linked to the home loan and offsets the amount of interest paid on the loan. For instance, on a $300,000 loan, if the customer has $10,000 in the offset they would only be charged interest on $290,000.

A redraw component lets customers access extra principal repayments they have previously made on their loan.

A couple of discussing their home loan with a mortgage broker.

Ms Taylor said borrowers should only put money into an offset account if they were happy to spend it. “For example, if you have $55,000 and are only willing to spend $5000, put the $50,000 into your home loan redraw,” she said.

“You are restricting that temptation of spending.”

Ms Taylor said customers could also put restrictions on their redraw accounts.

This puts a roadblock on the ease of just tapping into the money online.

3. Paying interest-only

While interest rates are so low, customers should be focused on paying down the principal as much as possible, mortgage online bidding service LoanDolphin’s chief executive officer, Ranin Mendis, said.

“The record low-interest environment provides an excellent opportunity to get ahead by paying down as much principal as you can on your home loan,” he said. “So it’s a good idea to repay principal and interest as opposed to interest only.”

Borrowers paying interest-only should be mindful they will be eventually forced by their bank to switch to principal and interest repayments.

Paying an interest-only often results in the customers paying a higher interest rate and they also are not paying off the principal.

By sticking with interest-only, customers fail to build up equity in the home and instead need to rely on capital growth. On a $300,000 30-year loan with a rate of 3 per cent, if the loan starts with a five-year interest-only period repayments are just $750 per month.

But once the interest-only period ends, paying down the principal would lift repayments to $1423.

The Reserve Bank of Australia’s biannual Financial Stability Review found the appetite for interest-only loans had dropped significantly.

Interest-only loans with loan-to-value ratios above 90 per cent are at their lowest level in about 10 years.

4. Failing to keep your bank on its toes 

Financial adviser Scott Haywood said borrowers should be phoning their lenders annually asking for a better deal.

“Ask what rate you are on and if you were a new borrower what rate would you be on because another bank can give me a better deal,” he said.

Sometimes customers don’t need to bother switching to save if they speak to the bank’s mortgage retention team.

It’s this team’s job to keep customers happy so ask to speak with them, tell them you could get a better deal elsewhere and see if they could cut their rate on the spot.

5. Borrowing more 

Just because the bank dishes out extra credit on a home loan doesn’t mean customers should take it.

No matter how much money a customer borrows, it eventually means more money to be paid back.

Customers should only take on debt they know they could comfortably repay.

Banks have certainly tightened up their lending practices after the financial services royal commission, Mr Haywood said.

“Pre royal commission it was borrowing as much as you can when you go to the bank,” he said.
“There were incentives from mortgage brokers and banks to lend more.”

@sophieelsworth