Buying a house does things to your brain. My personal theory is that the big numbers stun your left brain into silence, thus halving your IQ. It’s the only way to explain why, ever so often, people decide to pay more for the stupidest reasons:
1. Didn’t Know You Could Choose the Law Firm
When you buy a house, you need to pay conveyancing fees. This is for a lawyer to do the complicated work of loading a Microsoft Word template, and spending maybe 15 minutes to fill in the blanks.
Since it takes years of legal training to be able to do this, it’ll set you back anywhere from $1,500 to $3,000. There are also unusual cases where conveyancing fees have reached $5,000 + (usually when non-standard, entirely new documents have to be drawn up).
The thing is, different law firms charge different amounts. And there’s virtually no difference who handles the paperwork: paying a law firm $500 more buys you zilch.
Smart buyers will ask to see the firms on their bank’s board (each bank accepts a number of different law firms, not just one). From there, they’ll shop around to find the cheapest conveyancing fees.
2. Picked a Bank With a Higher Interest Rate
Some banks charge a higher interest rate than others. The price difference can range from under 1%, to over 1.9%. You can read more about how those numbers work in our other article.
Now, let’s say you pick an expensive home loan. What exactly do you think you’ll get? Better service? Free coffee-maker? Loyalty card?
Most of the time, the answer is nothing. Banks don’t charge you more for a home loan package because of its perks. They charge you more because they have a loans quota. As that quota fills up, they need fewer borrowers, and raise their interest rates. That’s it.
(Okay, maybe you’ll get some freebies, like shopping vouchers or something. But there’s no giveaway that will justify higher mortgage repayments over several years).
Considering you can compare home loan rates for free (try MoneySmart), there’s no excuse for being tricked into higher rates.
3. Don’t Realise You Can Refinance
After the fourth year, a bank’s home loan rate will usually make a big jump. For example, it’s not unusual for the interest rate to be 1.2% for three years, and then become 1.9% from the fourth year onward.
Some home buyers just shrug and accept it; like gravity, or pee stains when you have a cat. Truth is, home loan packages can be swapped. You don’t have to just sit there and take it, when the bank hikes up the rate. It’s called refinancing, and there’s almost no reason* not to do it when a better package is out there.
And in case you’re wondering, no, the bank won’t give you any bonuses for staying on.
*Refinancing does come with an administrative fee (usually below $1,500), and means you’ll have your credit worthiness checked again. But the cost and inconvenience can be tiny compared to how much you’ll save.
4. Forget You Have a Free Repricing
Refinancing means switching to a home loan package from another bank. Repricing means switching to another home loan package, but within the same bank.
Sometimes, banks will offer you one or two free repricings (also called free conversions). This allows you to switch to a cheaper home loan package, without the cost of refinancing. Some customers forget they have free repricing (and the banks conveniently forget to remind them), so they end up refinancing when a repricing would save them more.
It gets even more ridiculous if you tolerate a high interest rate while letting your free repricing go to waste.
5. Pay for Mortgage Insurance…That You Already Have
Mortgage insurance covers you if, for some reason, you can no longer service your home loan. It’s important when dealing with banks (they’re not as forgiving as HDB). For more on picking the right mortgage insurance, follow us on Facebook; we’ll cover it soon.
A fair number of home loan packages come with mortgage insurance. Home buyers just may not notice (because frankly, who notices anything hidden in a dozen pages of legalese), and “double up” on premiums.
Another common mistake is not comparing premiums for mortgage insurance. Each insurer has its own algorithms for calculating risks and premiums. One insurer may think it’s big deal that you have a family history of diabetes, but another may dismiss it as trivial.
Always shop around for better rates. And above all, don’t pay for mortgage insurance if your home loan package already includes it.