Oran Hall | Mortgagors need not be passive

Mortgage-lending financial institutions play a very significant role in facilitating home ownership. For how many people could afford to own a housing unit without borrowing to make the purchase?

Borrowers, though, need not sit back and wait passively for the day when they can breathe a sigh of relief that their debt has been liquidated.

Interest rate changes and the increase in the borrower’s equity in the property can create opportunities for borrowers to improve their position. The value of the borrower’s equity in the property increases as the market value of the property increases and the debt decreases as principal and interest payments are made.

As mortgage-lending institutions compete for market share, one way they try to become more dominant in the market is to make it attractive for mortgagors to switch their mortgages for residential and investment properties to them at an interest rate below what they are paying.

Switching, or transferring, a mortgage has several benefits for the mortgagor. One very significant benefit is the lower interest and thus the lower monthly payment which the mortgagor makes over the life of the loan.

The savings can be used in several ways. They can be used for investment or to cover other expenses in the budget. Switching can also facilitate the consolidation of other loans and make funds available to improve the value of the property by making improvements to it.

The ability to transfer mortgages from one provider to another thus gives property owners much flexibility in how they relate to the funding of their property. Mortgage switching, however, takes time to complete because of the process that has to be followed.

Lenders need to satisfy themselves that they are making a good business decision so, importantly, they will avoid a potential client who has a history of bad debt. A good credit rating is thus important, and they make independent credit checks to confirm this. Generally, they will want to examine the potential borrower’s history over the most recent 12-month period, as well as the ability of the borrower to pay, thus making income very important.

All the requirements for a new mortgage usually apply to a mortgage switch as well. For example, a surveyor’s ID and a valuation report are required in addition to pre-approval. Financial institutions from which the mortgages are to be transferred generally require advance notice – usually three months – or payment of interest in lieu of that.

The good news is that many lenders offer ‘fee free’ mortgages by which they pay the valuation, legal and other charges that the mortgagor would normally incur to make the switch.

There are boundaries on such mortgages in that there is a limit to how much can be borrowed, for example, a sum equivalent to 90 per cent of the value of the property, and there is a limit on how long the money can be borrowed for, for example, 35 years. Additionally, ability to pay is an important consideration.

CHALLENGES

Currently, it seems that mortgagors could encounter some challenges in switching their mortgages from the private mortgage companies if they are beneficiaries of the National Housing Trust Joint Finance Mortgage Programme.

Buying a property can cause real headaches at first and many people struggle to find the deposit even when they are able to make the monthly payments. Other people make very serious sacrifices to make the payments in the earlier years, but the situation gets better as income increases. As time passes, the mortgage payment which used to be a high percentage of income becomes smaller and quite bearable. This creates opportunities to save more.

As long as the loan is serviced well, the loan balance will fall and the equity increase. This should be used well and productively where possible. Most, if not all, mortgage-lending institutions facilitate loans against the equity in a property and have attractive ways to tempt their clients to borrow more as their equity in the property increases.

Here are some of the ways in which these loans can be used: home improvement like renovation and repairs, thus increasing the value of the property, education and loan consolidation. The first two examples promise good long-term benefits and the third may provide short-term or long-term benefits. It is best, though, to shun using the equity in a property frivolously.

Acquiring a property can cause much pain at the outset, but this can be reduced over time as income increases and as opportunities come to make a mortgage switch. Additionally, although property values may fall, the general trend is for them to increase consistently thereby boosting the equity and net worth of the property owner. Wisely used, this can further cause the property owner’s wealth to increase.

- Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.

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