So, why would you want to learn about mortgage finance? You can go straight to the bank, can’t you? Hopefully get a yes?
It all seems so easy, but there is a catch.
The catch is quite simple — unless you structure your mortgage to suit your situation, you could end up paying a lot more interest than you need.
Why would you want to do this?
When you tell your friends that you got 3.39% on your 2-year rate, it sounds good. But do you know what it really means? Are you confident that it’s the best outcome for you?
Have you considered that fact that you may be getting your salary put into a cheque account that pays no interest? Are you using the money in that cheque account to pay your mortgage at the end of every month?
If you are, then you should read on…
How much is your mortgage really costing you?
I have yet to hear anyone talking about this, as we have all been conditioned to talk about the interest rate.
Do you understand what a 20-year mortgage means? How does it compare to a 25-year mortgage? Or even a 30-year mortgage?
Well, it means your repayments are a bit higher, but the amount you could save in the long-term would be massive.
A mortgage is the biggest financial commitment you will probably sign up for. So you should make sure that you’re getting the best rates and aim to pay the debt off before retirement.
Paying down debt will give you choices down the road. It creates ‘equity’, which you can use to invest and improve your retirement or perhaps renovate your house.
Most people will commit to a 25- or 30-year repayment plan to keep their costs down. But I have helped clients pay off their mortgage within 12 years. This wasn’t even on their minds when we first met.
Doing the math
Why do we need a mortgage?
- To buy a house.
- To buy an investment property.
- To buy a business.
- To buy a portfolio of dividend-paying shares.
What does the standard mortgage cost over its lifetime?
In Auckland, you could be looking at a mortgage of $750,000 over 30 years at 3.5%. This would cost $462,480 in interest alone.
But don’t forget — this is after you have paid your tax. So, to have $462,480 in your hand after paying the government 30%, you will need to earn $660,685.
Imagine if rates go back up to 6% again. The total interest paid would go up to $868,920. That’s a lot of money out of anyone’s pay packet.
Now, you might say, ‘So what? I just want a house. $462,480 over 30 years isn’t much. I can afford it!’
The impact on your retirement
To a point, I agree. But given that money is hard to come by and you have a retirement to consider, would saving $50,000–$75,000 over the life of the mortgage interest you? If not, perhaps saving $160,000 might get your attention?
Imagine what you could do with $160,000. But, even better than that, imagine having your mortgage paid off early.
Just think about it a bit more. Typically, you take out a mortgage in your mid-30s. So 30 years takes you to 65.
I hear you say: ‘Age 65? But that’s retirement age! I won’t be working. I will have nothing except the house I own and perhaps some money in my KiwiSaver.’
Sobering, isn’t it? Nobody tells you these things unless you seek them out.
Signing for a 30-year mortgage at 3.5% doesn’t sound quite as good now, does it?
Going from debt to wealth creation
By managing your mortgage and using it as your bank account, you can get ahead. (There you go. That’s it. It isn’t a secret anymore!)
You can create equity in your house by paying down debt faster. You no longer just achieve it when the house appreciates in value.
So you have two wealth creators at work: you and your house.
By Year Five or Six, you should have enough equity — assuming you have put down a reasonable deposit in the first place — to start thinking about using the ‘lazy equity’ to invest.
If you want a decent retirement — or perhaps give yourself options regarding how, where, and when you work — you will find it beneficial to start accumulating assets. Yes, assets that can work for you 24 hours a day, seven days a week.
Your mortgage can also be used to invest in a business or to buy shares. So be smart. Once you have your mortgage under control, start to make it work for you, not the other way around.
Applying for a mortgage
When it comes to getting a mortgage, everyone is unique.
But here are some basic principles you should know before you start your loan journey:
- Look after your credit score. Don’t miss payments. Don’t default on any loans.
- Keep personal debt to a minimum, preferably under $10,000.
- Keep credit card limits as low as needed. Banks want to know what the limit is and will work off that, even if you pay off your card every month.
- Keep your bank statements clean, i.e. no dishonours.
- Show a savings history.
- Don’t change jobs just before applying for a loan. Otherwise, you will be deferred for three months.
- If you are going to change from PAYE to self-employed, talk to a mortgage adviser first. Most banks won’t lend to the self-employed for two years.
Who needs help?
I have arranged straightforward mortgages for mums and dads, for investors, for the self-employed. But we can also help you when the situation requires some lateral thinking.
This happens when the bank has said no or struggles to understand a client’s application.
These situations could include:
- Apartments less than 45 square metres.
- Overseas investors applying after the changes in government legislation.
- New jobs with seasonal earnings.
- Credit issues with applicants.
- Tax arrears.
- Property condition.
- Missed mortgage payments.
- Business investment with no current income.
And…the list goes on.
There is a lender for most situations. Mortgage finance can be sourced from the main high street lenders, a number of specialist mortgage banks, and in some cases, private lenders.
If you want to find out what your finance options are, I can guide you through your journey.
Click here to learn more about our Wealth Mortgages service.
I can’t wait to hear from you!