Whether you’re deciding on the structure of your 1st mortgage or your 10th, it’s worth thinking things through. It could save you from a mortgage unfit for purpose, costly restructuring fees and even thousands in interest over the long term.
If you go through Building on Basics, we will ensure you can make an informed decision about the mortgage products available. But to make the best choices for you and your family, you first need to understand your finances, current needs and goals.
1. Get clear on your finances
Consider your monthly income, expenses, and any existing debts. This self-awareness will help you determine a comfortable mortgage repayment amount without straining your budget.
How important is it for you to be able to manage your cash flow? Business owners especially may need to access equity in their homes to help manage the peaks and troughs of doing business.
You can choose to make mortgage repayments weekly, fortnightly, or monthly. Selecting a frequency that matches your pay cycle and occurs within a day or two of being paid will help you manage your money and ensure you don’t miss a payment due to a lack of funds. Other payment cycles can save you interest depending on your loan structure.
2. Think about your medium and long-term goals
Are you planning to grow your family? Is your property a stepping-stone towards your next investment? Are you planning on renovating? Is there a chance that you are going to sell your home in the near future?
Your mortgage structure should align with the financial consequences of your goals. For instance, if you plan to start a family, you might want a mortgage structure that allows the household income to decrease for a while. If you’re planning to renovate, you may wish to access the equity in your home, and if you’re possibly going to sell, you may want to fix your interest rates for a shorter term.
3. Reflect on your money habits
Are you a spender or a saver? If you’re a spender, you will benefit from restricting your access to revolving credit and other products that let you spend equity. Setting a mortgage up in a way that helps you save will put you in a much healthier financial position over your lifetime.
However, regardless of whether you are a spender or saver, it’s a good idea to have a bit of equity accessible in an emergency.
4. What do you think the interest rates will do in the future?
No one has a crystal ball, however, at Building on Basics we keep across the views of a variety of economists and property research facilities to stay up to date on what is happening and where the markets are going. We can get you up to speed if you’re not already across interest rate predictions.
What you do with that information depends on your appetite for risk. Fixed rates over a longer period provide certainty of outgoings but may cost you more depending on where interest rates go. Fixing for shorter periods can give you more flexibility as your situation changes and still give you certainty of your expenses in the short term.
Reflect on your comfort level with market fluctuations and choose a structure that aligns with your risk tolerance. Whatever your decision, we strongly recommend that clients fix for varying periods to cushion themselves from interest rate shock should rates sharply increase. This is called interest rate averaging.
5. Allow for the possible
If you’re possibly going to receive lump sums in the future (i.e. a bonus, sale proceeds from an investment or inheritance), then having the flexibility to pay a chunk of your mortgage off as and when you can will save you considerable interest in the long term and increases the likelihood that any windfalls will be used wisely. If your loans are fixed you may be limited as to how much you can pay off without incurring penalties.
Now you’re ready to decide on your mortgage structure
Once you have defined your situation, you will have a clear understanding of your needs and use this information to decide:
- Between fixed term/s and floating, or a combination of both
- Loan term
- Repayment frequency
- Payment flexibility
- Mortgage products such as offset accounts or revolving credit facilities.
The best structure is the one that allows you to live while paying the debt off as fast as possible. Depending on the answers above and the products available, you may need to change how your loans are structured or even change the bank you are with to access the bank products that will work best for you. It’s not all about the interest rate!
Contact us if you haven’t already, and we can help you navigate the mortgage market. We will take the time to understand your unique situation and provide personalised recommendations based on your circumstances. We’ll then manage the application process on your behalf.