Will you buy your first home soon, or want to pay your mortgage off faster? Mortgage adviser Ryan Smuts, of Kris Pedersen Mortgages, has five common mortgage mistakes – and how to avoid them.
5. Not looking after the little things
Due to Covid-19, banks are now scrutinising many things in a lot more depth. Banks typically use your last three-six months of spending to find out spending forecasts when assessing home-loan eligibility.
If you’re planning to use your current bank, they will access your accounts. If you’re planning to join a new bank, you’ll need to provide bank statements.
Avoid spending large amounts often and avoid letting your account go into unarranged overdraft. This is usually an admin error, rather than not having enough money to pay your bills, but banks are starting to view this as poor money management – especially if it’s happening often.
I strongly recommend keeping your bank accounts spotless – think about how your spending might look to a lender.
4. Not understanding bank serviceability criteria
Just because you believe you can afford a loan, doesn’t mean the banks will immediately lend to you – they will always be more conservative. Use a bank’s mortgage calculator to get a guide for what your proposed mortgage payments may be. However, banks will use other calculations to figure out affordability. The main changes I see now are:
- Banks use ‘stress test’ rates for existing and proposed debt. Most banks test around the 6%-7% mark, on a principal and interest basis for all debt. This is very different than when rates are in the 2%s, and especially if you have some debt on interest only. The payments they test your ability to pay are a lot higher than what you will actually pay (that’s why it’s a ‘stress test’).
- Income types. Post-Covid, banks are very conservative around variable income (like bonuses). Often it needs to be in place for a long period of time. Rental income is another that is scaled back to about 75-80% of the gross figure.
Don’t make assumptions with banks. It’s worth getting things checked in advance.
3. Being too relaxed if you’re self-employed
Since Covid-19, banks want data from the last financial year (accountant prepared) a lot sooner than previous years. At the time of writing, many lenders want 2020 financial accounts finalised, and also may ask for year-to-date data to show things are still trending as they were. They may even ask questions around the Covid-19 wage subsidies you’ve taken (if any).
If you’re self-employed and planning on applying for a home loan, I recommend getting all your financials up to date, and having them ready to present to your lender.
2. Not reviewing mortgage rates
Just because your mortgage is fixed, it doesn’t mean you’re stuck with that rate until expiry. We frequently run a ‘break-fee analysis’ for clients.
We recommend doing this at least annually. If the long-term cost saving benefit outweighs the break fees, it can help you get ahead.
1. Not looking for the best product
Learn how revolving credit accounts and/or offset facilities could help better utilise your savings. You may earn 1% interest in the bank (or even less) and pay tax on your savings, while you’re paying 2/3/4% interest on your mortgage.
If you don’t need your savings soon, offsetting the mortgage payments might be a suitable option. On the equivalent amount of savings you had/were willing to use, you wouldn’t EARN interest, but you also wouldn’t PAY interest on your mortgage. In many cases this can add up to a considerable difference over the life of a mortgage.
Published 21 August 2020
Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read our Product Disclosure Statement. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. We recommend you speak with an independent financial adviser. All content is correct at time of publication date.