Mortgage loans are a painfully complex mess of terms and conditions. It doesn’t help that most bankers and brokers are as engaging as watching grass die, when it comes to explaining the whole mess. Rather than give you the usual hours-long talk about mortgages, here are the main areas to focus on – the mistakes that many people make:Mortgage loans are a painfully complex mess of terms and conditions. It doesn’t help that most bankers and brokers are as engaging as watching grass die, when it comes to explaining the whole mess. Rather than give you the usual hours-long talk about mortgages, here are the main areas to focus on – the mistakes that many people make:
Mistake 1: Refusing loan packages with long lock-in periods, without thinking it through
This is something of a knee-jerk reaction. We don’t like to lose flexibility; so when we’re told a home loan will “lock us in” for three years, five years, or some other duration, the first instinct is to turn it down. Even the term “lock-in” sounds negative; like what happens after a fistfight with a policeman.
To be clear, the lock-in period is the period in which you can’t refinance (i.e., get another bank to take over your home loan). This can be bad, because if another bank has a cheaper rate, you can’t switch to it. On the flips side however, you are compensated for the loss of flexibility.
In many cases, a longer lock-in period also means a lower rate.
Now let’s take a deep breath and think that through:
Home loan rates in 2023 are at the highest we’ve seen since the 2008/9 Global Financial Crisis. Home loan rates back in 2020 still averaged around 2.5 per cent. By end-2023, they could reach around five per cent.
Given how fast rates are climbing, does it seem likely that by the end of a three-year lock-in, there’s going to be a cheaper loan to refinance into?
I suppose it’s possible, but what’s even more probable is that the market will cure you of your excess optimism.
Then there are some of you who aim to sell the property right after the three-year Sellers Stamp Duty (SSD) no longer applies. In which case, do you really care about the mortgage rate beyond those three years?
Simply put, there are times when choosing the loan with the longer lock-in period makes sense. If you’re not likely to refinance anyway, then the lock-in is more or less meaningless. It’s not even a real disadvantage.
Mistake 2: Thinking every loan comparison site compares from all the banks
Someloan comparison sites work with all the banks. But notice that some websites never claim to compare among all banks, just that they compare among multiple banks.
For all you know, they only have deals with three or four banks, and are showing you just a tiny slice of the available options.
That’s why you should never stop at just one loan comparison site. Use multiple sites to get a wider perspective, and to verify the claims of various brokers and bankers.
Also, the “lowest rate” one site may be higher than on another, even when dealing with the same bank. Sometimes, mortgage brokers have personal connections they can leverage; and their comparison site may be able to get a better deal than others.
Mistake 3: Not caring about which law firm the bank picks
Different banks work with different law firms (check the bank’s board). Sometimes, there’s a law firm that only works with one specific bank, and none of the others.
Now if you don’t care who handles your loan, some banks like to sneakily use these firms, which they know other banks don’t work with. This would mean that, when you try to refinance, a new law firm (one recognised by your new bank) has to take over, and you need to pay the conveyancing fees all over again.
This is just one added annoyance to discourage you from refinancing (the new conveyancing fees will be around $2,500 to $3,000, on top of your other refinancing costs).
A lot of borrowers don’t realise they can press for another law firm, and possibly even one that charges less. Where possible, try to pick a law firm that’s recognised by a bigger number of banks.
Mistake 4: Not realising you can pursue different valuations
Different banks use different companies to conduct valuations. This is quite a big deal to borrowers, because your maximum loan quantum is pegged to the lower of the seller’s price or valuation.
(As of 2023, the maximum loan quantum is usually 75 per cent)
But don’t be under the impression that you need to accept the first valuation. You can push for a different valuation to be accepted, if you need to raise the loan quantum (although the bank might want you to pay for the new valuation; expect sums of between $500 to $700).
If you still can’t get the valuation you want, remember that another bank may be willing to accept a higher valuation. Shop around enough, and you might find them. Be warned though: the bank that ends up accepting the higher valuation may not be the cheapest, in terms of interest rates.
Mistake 5: Thinking the Progressive Payment Scheme follows a strict sequence
If you buy a that’s still under construction, the Progressive Payment Scheme (PPS) means you pay less at the beginning.
As the builders complete the different stages of your home (e.g., laying the foundations, putting down roads, completing the wiring), your monthly home loan rate gradually increases, hitting the full amount at the point of the Temporary Occupancy Permit (TOP).
But I find some buyers are shocked when, instead of rising gradually, multiple stages of construction are finished at once. This means the monthly loan repayment can jump by a much larger amount, than the slow-and-steady approach the borrower expected.
This is entirely normal; in fact it’s even likely for smaller condo projects, which tend to be completed sooner.
(But look on the bright side, you get to move in sooner too)
All of this can get annoying to deal with, so if you ever feel lost, reach out on Single Digit Millionaire. We’re here to help with your questions and challenges, or to put you in touch with people who can.
