Managing Your Mortgage
Once your mortgage is in place, there are steps you can take to make sure it is always working for you as well as it can.
In this section, you'll find information about:
* Reviewing your mortgage
* Consolidating other debts into your mortgage
* Restructuring or switching Banks
* Taking a break from mortgage repayments
* What to do if you can't keep up with repayments
* What to do after you've made the last payment.
Reviewing Your Mortgage
It’s a good idea to check things like your level of repayments or your interest rate from time to time. You could do this when your fixed rate loan is about to expire, when there is a big change such as a new job, when you get a big lump sum such as bonus or EPF withdrawal.
Are you still making mortgage payments which are as big as you can comfortably afford? Cash put towards reducing your mortgage balance is a much better deal financially than cash put into a savings scheme. Putting money towards your mortgage provides the equivalent risk-free return of a savings account which pays an after-tax interest rate the same as your home loan. Put another way, if your mortgage rate is 8 percent, putting money into a savings account only make sense if you can find a no-risk savings account which pays more than 8 percent after tax!
Even boosting your repayments by the equivalent of $50 per month may save you thousands of dollars’ interest, and let you become mortgage free few years earlier. You can see how much lifting your repayment will save you with the Home Loan Early Payoff Calculator.
While a long-term focus of paying off the debt quickly will save you money, there are some occasions when using the flexibility and relatively low interest charges of a mortgage to fund something other than a home is worthwhile. For example, if you don’t have the cash to replace a home appliance, using your mortgage to do it will be better than paying a credit card interest rate of 19 percent or a hire purchase rate even higher.
This option is best kept for necessities. Borrowing against your mortgage to pay for luxuries like a boat or an overseas holiday will just make the cost of those things far higher. Whenever you are considering using your mortgage like this, check the fees and interest rates to work out the real cost.
Consolidating other debts into your mortgage
If you have a number of loans that charge high interest rates – a car loan at effective rate of 9 percent, perhaps, or credit card debt at 18 percent – then paying off these loans by increasing the amount of your mortgage is worth considering. You could save money because mortgage interest rates are lower. To make this work properly, you’ll need to increase your mortgage repayments to keep the date you will pay off your mortgage the same. Preferably, you will make your repayments the same as the total repayments that you were making on all your loans.
Restructuring or switching Banks
Sometimes, changing the structure of your mortgage could save you money. You might switch some or all of your loan from a floating rate to a cheaper fixed rate, for example, or you might take your mortgage to another lender altogether.
You’ll need to look at the costs and the possible savings carefully. Your existing lender, another lender, or a mortgage broker could help. Switching from one type of loan to another with your existing lender might come with a fee of a few hundred dollars, which you could try to negotiate down. Shifting your home loan to another lender may or may not cost a lot more, depending on the lender, the deal being offered and the circumstances.
Possible costs to consider include early repayment fees if your loan is on a fixed interest rate; the application fee a new lender might charge; a legal bill and possibly a valuation bill. But you will not always face all of these. To get your new business, a lender may waive its application fee, pay your legal fees and may not demand a valuation. Some even pay for the legal work necessary.
You could add up the costs, then look at the potential savings and work out how long it would take for the savings to cover the costs. If it would take a long time for the savings to outweigh the costs, be cautious. Other things like interest rates could change in the meantime.
Some loan broker which specialize in restructuring people’s mortgages work through telemarketing. You might get a call one night asking if you’d like to save money on your mortgage and pay it off years earlier.
What these mortgage reduction agencies do is re-structure your mortgage as a revolving credit facility, with your pay direct credited into it. It does have the potential to reduce the amount of interest you pay, but the catch is that mortgage reduction agencies often charge $3,000 or $4,000 in fees. You can set up a similar mortgage yourself at most of the big banks and some smaller lenders, or through a broker, for much lower fees.
Some mortgages allow you to take a "loan repayment holiday" for up to three months or longer. You don't pay anything during this period. But interest is still being charged to your mortgage. This means that unless you lift repayments after the holiday, the mortgage term is being pushed out and you'll pay more in interest overall. Repayment holidays are best used only as a last resort.
What to do if you can't manage
If you’re having trouble making ends meet, the first thing is to put together a budget to see where your money is going. For personal advice you could contact the Financial Counselling and Debt Management Agency, AKPK. Their service is free.
If you think you’ll miss a mortgage payment, get in touch with the lender quickly. They can tell you what the options are. Perhaps you might just pay the interest on the loan for a few months until you’ve got your finances back on track.
If you’ve borrowed too much and the value of the property has fallen, you may find that you have “negative equity”, where the money you owe is more than the home is worth.
If there is no way you can keep the mortgage going or you walk away from it, the lender may take the home to a “mortgagee sale” to recover their money.
Any money left over from the sale after all the costs are paid will be paid to you. If there’s not enough money to repay the mortgage, the lender may take action to get the rest of the money from you. The bank may be able to claim any money you hold in other accounts if you are behind in payments on the mortgage – it depends on the wording in the documents. The lender usually can (and probably will) also pursue any guarantor for the loan.
Free at last
When you've paid off your home loan, it's fair enough to celebrate. But keep up the habit of setting money aside on a regular basis - ideally, at least the same amount as you were paying to the mortgage - to save for your retirement.
If someone guaranteed your loan, then make sure that the guarantee is cancelled when the loan is paid off.
And while you no longer owe anything on your mortgage, don't "discharge" it - that is, don't get rid of the legal security which the lender has over your home. If you ever want to borrow money in the future, you won't have to pay to set up the legal documents again if they're still in place. But this only apply to some banks. check with your lenders.