1. Purchasing before pre-approval
Buyers can get caught up in the excitement of house shopping and bidding at auctions without first getting a pre-approval from their lender.
This can be incredibly risky and leave you in a precarious position if your finance falls through.
Buying a property at auction is unconditional and will usually require you to put down the initial deposit. If you are then unable to get a loan to cover the purchase price, you may have to forfeit your deposit or face other serious financial penalties.
Organising mortgage pre-approval prior to house shopping will give you an exact budget to stick to and help you buy property with confidence.
2. Not understanding all the costs involved with buying a property
There are many additional costs involved with purchasing a property that are often underestimated.
Whilst we all factor in the price of the deposit, a lot of buyers don’t plan for other expenses such as:
- Settlement and conveyancing costs
- Application fees
- Valuation costs
- Lender's Mortgage Insurance
- Building and pest inspections
- Stamp duty
When added up, these costs can be substantial. Factoring each of these expenses into your budget will help you avoid having to dig into your savings to pay for them.
For a full list of every hidden cost when buying a property, you can check out our guide here.
3. Draining all your savings on the deposit
Being disciplined and consistent with your savings is crucial for minimising risk over the many years of your mortgage.
While it is tempting to dump all of your savings into a deposit, you should always leave a savings buffer to safeguard from uncertain or changing circumstances.
Naturally, your expenditure will be different from month to month. Being consistent with your budgeting will help you smooth out the bad months with the good ones.
Ultimately, a nest egg will go a long way toward protecting you from financial stress, which can leave a big toll on your health. Because of this, we always strongly advocate that our clients don’t drain all their money into a deposit but rather maintain a healthy savings buffer for the duration of their home loan.
4. Borrowing more than they can handle
In theory, a bank will be conservative and prevent a borrower from entering themselves financial hardship.
However, banks won't always know your life plans and what the future holds for your finances. Are you planning a job change? Are you planning a long holiday? Are you about to start a family?
When taking out a mortgage, you need to account for these potential changes and how they would impact your ability to repay the loan.
Whilst the temptation may be to stretch yourself to afford a better property, it may end up impacting your quality of life. Not being able to make your repayments is the worst-possible case scenario and something you should wish to avoid.
5. Not understanding their repayments if rates rise
Interest rates will go up and down, as will your mortgage repayments.
It’s important to understand what interest rate changes will mean for your repayments and how they will affect your budget.
When interest rates rise sharply (like they have in recent months), the mortgage holders who struggle the most are the ones who failed to prepare for this scenario.
Organising solutions in advance, such as opting for the certainty of a fixed rate, will help you adapt faster when interest rates change.
Before making any loan decisions, it’s important to first speak to your mortgage broker who can help you understand your repayments and strategize the best course of action to stay on top of them.
6. Not knowing your credit score and the impact on a home loan
Your credit file is one of the first things a lender will look at when you apply for a loan. If you have a poor credit history, it will affect your ability to borrow.
Before applying for a loan, you should first check your credit score and determine whether any action is needed to clean it up.
This may involve correcting any mistakes, paying off outstanding debts or just getting a better understanding of your borrowing power.
Requesting a free copy of your credit report is easy, and you can do so from any of these sources:
You should also reach out to your mortgage broker for help on how to fix any credit issues you might have.
7. Assuming the bank you are with is the best for your home loan
It can be a costly mistake to pick a lender based solely on the bank you’re currently with. This restricts you to fewer home loan options and may mean you miss out on getting a much better deal elsewhere.
We encourage our clients to treat their home loan like a commodity and to have an open mind when choosing a lender. Oftentimes, the cost of not looking elsewhere can be expensive.
A good mortgage broker will be able to identify the best rates and deals across a wide range of lenders, helping you decide on the best financing option.
8. Choosing a home loan based solely on the interest rate
Whilst getting a good rate is important, it’s far from the be-all and end-all. Many different factors should be taken into account before making a decision on your mortgage.
For example, while a lender might offer you a home loan at a cheap rate, they might not give you the option to attach an offset account. This could be to your detriment as an offset account may end up saving you more on interest costs than a lower rate would.
To use another example, a lender may offer you a 3.50% rate on a loan worth $500,000. Another lender might offer a 3.6% rate but allow you to borrow $600,000. Whilst you may be repaying the second loan at a higher cost, the ability to borrow more may better suit your property journey.
Other factors to consider include the length of the loan term, repayment type, fees and the flexibility of the loan.
The best home loan for you will depend on your circumstances and needs, not just the best rate on the market.