When a lender provides you with a mortgage, they want to make sure that they have good security if something was to go wrong. They need to protect themselves against default on the mortgage. They look at your income (servicing ability) for the mortgage and also how much they are lending you as compared to the valuation of the property (Loan to Valuation ratio or LVR).
Last year the Reserve Bank tightened the rules around how much lenders could lend to ‘higher risk’ borrowers – those with a LVR of more than 80% of their property. As a result a number of people found it more difficult to purchase a home.
Here are some tips to consider when you are checking where you are at with your mortgage:
- Has the value of your property gone up recently?
If you have borrowed money with a LVR of 80% or more, and the value of your house has increased, now is the time to go back to your lender (or get a mortgage broker to assist you), to see if you can get better terms and conditions on your mortgage.
- Is your mortgage on ‘non-residential’ rates?
This could happen if the property that you are purchasing is not zoned as residential or if you borrowed the funds for a business, or other reason (apart from your family home.) If you set up your lending properly, you can reduce these rates if you provide your home as security for the mortgage.Remember, the lender will want all security that they can get for the mortgage that they are giving you.The better security you can give them, the better your negotiating power.
- Do you have a ‘revolving credit’ mortgage that may not be working for you?
We meet a number of people who have put in place a ‘revolving credit’ mortgage on the recommendation of the lender, and it just isn’t working for them.It takes great discipline to ensure that the balance of these mortgages reduces.We recommend that many people set up these mortgages on fixed rates or floating mortgages with specific repayments so that the mortgages actually reduce in value.
- Is your lender the best value available for you?
If your income has increased, or the equity in your property has increased, you will be more attractive to lenders than when you first set up your mortgage.It might be time to talk to a mortgage broker and get them to see if you are likely to get a better deal at a different lender.
- Should your investment property mortgage be on ‘interest only’ terms?
Most lenders put a time limit on ‘interest only’ terms for borrowing for residential property.During the Global Financial Crisis, many banks decided to end these interest only terms and required clients to pay Principal and Interest on their investment property loans.Now is a good time to review your situation, it might be that changing lenders will enable you to put those principal payments into another investment.
- Have you used a QV as your property valuation as compared to a Market Valuation?
If your current lending is over the desired 80% LVR, you are likely to be paying more in interest than if you were under this ratio.One thing to consider is paying to get a Market Valuation on your home, which could value your home at more than the QV (Government Valuation.) By spending around $500 - $750, you could save yourself quite a bit in interest over the long term.
If you would like some assistance with making sure that your mortgage arrangements are working well for you, contact us by clicking here.
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By Paul Swarbrick