In my 17 years in financial services and mortgage management, I’ve noticed that many households are not evaluating their financial situation regularly enough, and are therefore not updating their structures to suit themselves. There are a number of consequences of not tracking your finances, especially when it comes to your mortgage.
I’ve put together a series of questions to ask and evaluate to ensure you’re on the money when it comes to your mortgage health check.
1. How old is your mortgage?
I’m continually surprised that many people do not know or track how old their mortgage is. Keep a diary or spreadsheet of important financial data. Compile important data so you know where you are at at all times or engage an adviser to assist you with this and remind you when it’s time to reassess or refinance your mortgage. So many households are losing money as we speak due to nothing more than poor money management skills.
2. Is your mortgage from old money?
Have you ever noticed when you fill up your petrol tank after prices drop that not every station along the strip has dropped their prices the same margin? Often, this is because they are tracking the cost of their fuel stocks against what they paid for it. Sure enough, as they sell out the older, more expensive reserves, their prices also come down in line with the other competitors. Mortgages can also be similar especially if you have had your mortgage for the best part of the last decade. I’m seeing many clients with mortgage rates around 5 to 6 per cent. This is unnecessary in most cases. You’re simply throwing away good money for no reason and should look into refinancing options at a more competitive rate.
3. Is your interest rate competitive?
When was the last time you check what your rate was? Did you know most households cannot say what their current mortgage rate is right now? How many of your mortgage statements are still sealed in the envelope they arrived in? It’s a very competitive market place and a rate reduction of only 0.5 per cent could save you thousands of dollars.
4. Do lenders look after existing customers or new customers better?
You might be shocked to realise that lenders have a clear appetite for new clients and place far less importance on their existing clients. Every time we see a rate movement up or down, there are always two different rates produced. One for the existing client and another different rate for the new client. Which one is lower? The new client rate of course. Particularly when we have a series of rate changes, such as over the last couple of years, it’s important to review your mortgage regularly to ensure you are staying in touch with the current market. Just a few movements could place you out of the market by as much as 0.3 to 0.5 per cent.
5. Is your mortgage structure aligned with your circumstances?
Our lives are incredibly fast paced. The loan you set up when you purchased your first home might no longer be serving you now. Re-evaluate, perhaps with a mortgage manager, your circumstances and advise the best structure for your current or changing needs. The interest-only portion while your wife was on maternity leave may no longer be suitable since you are both working full time again. The variable home loan may need to be reviewed in relation to the changing interest rate environment to provide peace of mind and stability of repayments. The fixed loan may have served you well when you had a larger mortgage or lower income, but now that your cash flow has increased, debt reduction strategy may be far more appealing. While you're re-evaluating these needs, you might likely also benefit from a lower rate, loan consolidation and improved cash flow positioning.
6. What are your goals?
Your mortgage has come down a great deal or your equity has increased dramatically over the last several years. What now? It might be the time to move from debt management strategy to wealth creation and creating an investment portfolio. Your equity can be utilised with the correct mortgage structure to give you access to a deposit on an investment property and maybe at the same time you can touch up those minor tasks and improvements you haven’t gotten around to doing around the house. Combining goals is wise to create an effective mortgage strategy.
7. How should you choose the right mortgage and right lender?
Make sure you do your homework. However, make sure you’re not making multiple finance inquiries with different lenders as this will severely damage your chances of credit. Look at the market position of interest rates and mortgage features via the internet.
Don’t get sucked into just focusing on the lowest interest rate. You need to assess more than just the interest rate, which has to be aligned with your goals. Certain loan features such as an offset account, flexibility and low, or no, annual or ongoing fees should be considered in your decision. You should also be assessing the costs of refinancing, any break-costs from your current loan, as well as any mortgage insurance payable.
Don’t forget to assess what the comparison rate of the loan is. Don’t just look at the advertised rate. There could be other costs associated with the mortgage. Be aware that most online comparison sites do not compare the whole market and may have a vested interest when recommending certain lenders or products. Try to find a trusted adviser who has your best interest at heart.
John Maxwell, senior mortgage and finance consultant, Cocalex Consulting