1. Don’t over borrow: Deciding how much to borrow is important when getting a mortgage. Banks typically approve loans to a certain level but mortgagors should remember it’s not always necessary to borrow the full amount. What you can borrow and what you should borrow don’t have to be the same.
2. Fix or float?: Do you choose a mortgage with a fixed interest rate or a floating (variable) rate? The answer will depend on individual circumstances, including how much risk the mortgagor can take. A low earner might be less able to cope with a sudden rise in interest rates, for example, so might prefer the certainty of a fixed rate agreement.
3. Scrutinize fees: Consider the upfront fees of a mortgage as well as the interest rate when calculating costs. If upfront fees are too high, mortgagors can pay more in the life of the loan than a mortgage with a higher interest rate but lower fees. Better rates are likely available for borrowers with a larger deposit (and lower loan-to-value ratio).
4. Any extras?: In addition to paying the monthly mortgage, homeowners will need to budget for building insurance, maintenance and various taxes that renters often do not pay. Work the extras into finances before buying to ensure the costs can be met.
5. How many years?: Should a mortgage be 10 years? Or 20 years or more? The ideal length of a mortgage will vary – with factors including the size of the debt, the borrower’s income and their lifestyle. Those approaching retirement, for example, may want to repay their mortgage before they stop working. There is an argument that shorter terms better suit the more frequent house moves in modern lifestyles.
6. Put it to the test: Ask how lifestyle changes during the course of a mortgage might impact repayments. Will marriage, parenthood or launching a new business put strain on finances? Asking these “what if” questions (and coming up with a plan to cope) is a type of stress testing that can help in the long term.