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Tuesday, October 30, 2007

Relying On A Mortgage Calculator Can Be Risky

While the simple mortgage calculator was not much use for my friend’s purposes we did find a mortgage calculator that compared the interest rates of her existing lender with another lender she was considering refinancing with. Again though, this mortgage calculator was strictly considering the impact of interest rates over varying terms. My friend was comparing her existing mortgage manager loan with that of one of the big four banks. The bank had quoted her a monthly instalment which was lower than that being sought under her existing facility and this was confirmed when she compared the interest rates through the mortgage calculator. The interest rate was marginally lower than the mortgage manager’s rate. However when she looked at the fine print in the product details on the bank’s website she found that on top of the interest rate the bank was also going to seek a monthly fee of $8. She would also be paying for transaction fees on her account. When she added up the fees and the monthly instalment figure, the total monthly repayment was greater with the bank’s loan. So, while the mortgage calculator had indicated that she would be better off refinancing, the reality was that this was not going to be the case at all. She also realised that the bank’s monthly mortgage payment had been calculated over a 30-year term while her existing loan was arranged on a 25-year period. Obviously you will be paying a greater amount per month on a $250,000 loan if you choose to repay it over a shorter term. The mortgage calculator was able to quickly show the difference in the monthly figures over the different loan terms. Had my friend decided to proceed with the refinance and pay an application fee she would have been worse off financially once the refinance has been finalised.

Furthermore, the mortgage calculator did not factor in some important benefits she was enjoying, particularly a 100% offset loan feature which enabled her to reduce her monthly instalment significantly. By all means use a mortgage calculator as a guide but before committing to any fees or paying a deposit on a new purchase, check with a mortgage manager or other lender to make sure you and your mortgage calculator are on the right track. Before refinancing it is always a good idea to speak with your existing lender. Unless there is some event that has annoyed you and you have made the decision to leave because of the poor relationship you have with your existing lender, then discuss any concerns you might have with your existing lender - they will be willing to run through any mortgage calculator figures you want clarified and will be generally keen to retain your business.

While my friend was looking for a mortgage calculator to help her with a refinance decision others want to use a mortgage calculator when they are trying to work out the maximum purchase price they can go to on a property they are keen to buy. Just as in a refinance scenario, a mortgage calculator can be handy but make sure you check with a mortgage manager or lender before you exchange contracts. Most lenders will provide you with an approval in principle that will give you added comfort at auction or when negotiating with a real estate agent or vendor.

In Australia, a mortgage calculator can be useful but do not rely on it solely when making finance decisions that will have a significant impact on your cash flow over 25 to 30 years.

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7 Comments:

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October 2, 2008 at 4:40:00 AM PDT  
Blogger Sara DAr said...

Once you've found the best mortgage lender and best mortgage loan, start negotiating for the best possible deal. Mortgage lenders and brokers often change their prices for the same mortgage to different consumers for no apparent reason other than they can pocket some of the difference in price as profit. Ask your mortgage lender or broker to put down all costs of the mortgage in writing, then request that they waive or reduce some of the mortgage fee or lower the rate or points. You don't lose anything by asking.

Simple Mortgage Calculator

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