Mistakes to Avoid When You’ve Got a Mortgage

& what to do instead

So, you’ve got a mortgage, congratulations! You’re officially on the homeownership rollercoaster, complete with unexpected rate hikes, endless bank statements, and the nagging feeling you should be doing something smarter with your loan.

Mortgage mistakes can be costly – if not now, in the future. For all of us who already have a mortgage, here are the top seven mortgage traps we should avoid, along with a few tips of what we can do instead.

1. Using Your Mortgage As An ATM

Your mortgage is not a bottomless ATM.

As we repay the loan on our home, and as property prices increase, it’s natural for us to start feeling wealthier. We may even have a chat with our banker, who could suggest we obtain some extra borrowing – in other words, increase our mortgage – to spend on something like renovations, a holiday, a new car, or something else. Despite the temptation, this is generally the last thing we should do!

This is mainly because doing this can cost a lot more than we first might think, as mortgage repayments are spread across such a long timeframe, even if they usually come with comparatively low interest rates.

Even if it wasn’t that costly, taking on extra debt can also leave us more vulnerable to the next economic shock or issue we face in life, let alone reduce our chances of achieving other major goals, such retiring as soon as we might like! 

2. Sticking With the Same Mortgage Lender (Bank) Forever

It's a common oversight for New Zealanders to maintain a sense of unwavering loyalty to their existing bank, particularly when it comes to their mortgages. This often leads to missed opportunities, as the New Zealand banking landscape is a highly competitive arena. Banks actively engage in what's known as "poaching," aggressively seeking to attract new mortgage customers, especially when fixed-term mortgages are nearing their expiration.

This process, known as refinancing, involves switching your mortgage to a different lender, a strategic move that can yield substantial financial benefits. The advantages extend beyond merely securing a lower interest rate; banks frequently offer mortgage cashback, a lump-sum payment designed to incentivise customers to switch. This one-off financial incentive can be used to reduce the mortgage principal, cover associated moving costs, or be allocated towards other financial goals.

By neglecting to shop around every few years, homeowners forfeit the potential for significant savings over the life of their mortgage, improved financial flexibility through more favorable loan terms, and the opportunity to build equity more rapidly.

Proactive exploration of available mortgage options is key to optimising financial well-being and securing the most advantageous deal possible, especially if you already have a mortgage.

3. Fixing a Mortgage for Too Long

Unless there’s a good reason, fixing all or part of a home loan for too many years can be a restriction we just don’t need. Banks often love this because it can tie us to one lender (bank) unnecessarily and stop us from shopping around over a period of many years. It will nearly always cost us our flexibility – for instance if we receive a bonus, inheritance, or other windfall, and want to repay some of the lending.

Some of us might logically think when rates are expected to go up, that fixing our mortgage rate for as long a period as possible is a great idea. At times when most financial commentators and “experts” believe that interest rates will rise, the increases are usually already factored-in to any rates we’ll be offered anyway – we need to keep in mind that banks and other lenders do this every day, so have teams of people studying such things and ensuring the rates they offer will still make the bank money for many years to come.

Related material:

• Mistakes to avoid when selling your home‍‍
• ‍How to increase your home value‍
• Should you pay off your mortgage early?

4. Not Fixing the Mortgage at All

Nobody really knows what will happen with interest rates. It wasn’t so long ago we had record low interest rates in New Zealand, followed by the steepest ever increase in interest rates soon after.

Fixed term mortgages can give a little buffer to this sort of scenario, and typically fixed terms offer more competitive rates than the floating rate of the day – even in an environment where interest rates are falling.

While it’s impossible to know what the future might hold, leaving all of a mortgage on a floating rate will likely cost us. Unless there’s good reason not to, it pays to fix at least a portion of mortgage debt.

5. Slipping Into a Rut

Securing a home is a monumental achievement for most individuals, a significant life milestone.

However, the satisfaction of homeownership can sometimes lead to a state of financial inertia, where homeowners settle into a routine of simply making minimum mortgage repayments and neglecting to reassess their financial strategies over the years. This "rut" can be a costly oversight, as life circumstances are rarely static. Careers progress, incomes rise, family dynamics evolve, and financial aspirations shift. Moreover, the ever-fluctuating nature of interest rates necessitates periodic reviews of mortgage arrangements.

To avoid this stagnation, take a proactive approach, such as an annual evaluation of your financial situation, in this case with a focus on the mortgage. This evaluation should encompass critical questions designed to optimise your financial outcomes.

1. Firstly, homeowners should consider whether they can increase their repayment amounts, either through lump-sum contributions or higher regular payments. This decision hinges on individual circumstances and priorities. Some may prioritise accelerated debt reduction, willing to make short-term sacrifices for long-term gains, while others may seek a more balanced approach, ensuring their current lifestyle aligns with their future aspirations.
2. Secondly, the evaluation should address the potential for alternative investments. If surplus funds are consistently available after each pay cycle, exploring investment opportunities beyond the mortgage may provide greater returns. For instance, you might benefit from investing in a share portfolio or accessible managed fund, rather than making extra mortgage payments.
3. Finally, homeowners should assess whether they have built sufficient equity in their property to leverage it for further investment. The possibility of acquiring rental property, for example, represents a significant wealth-building opportunity.

A comprehensive annual review can empower homeowners to adapt their financial strategies to their evolving needs and seize opportunities, rather than remaining trapped in a cycle of passive ‘set and forget’, mortgage management.

6. Neglecting to Review Insurance

So this isn’t directly about a mortgage but hear us out.

Just like your mortgage, your insurance isn't a "set and forget" deal. It's a living, breathing part of your financial security, and it needs regular check-ups. Too many Kiwis make the mistake of slapping on a policy when they first get their mortgage and then letting it gather dust. But life changes, and so does the value of protection you need. Think about it:

• Has the rebuild cost of your house kept pace with inflation and those rising material costs?
• Have you added new treasures to your home that your current contents insurance wouldn't replace?
• Have you repaid a lot of your mortgage since you first took out your insurance, so may be able to make regular savings by reducing some types of cover such as your life insurance?
• What about those curveballs life throws? Maybe you've started a home business or welcomed a new addition to the family. Maybe you now earn more, so should carry more income insurance.

Your insurance is your safety net, so make sure it's strong enough to catch you when you need it most.

7. Listening to Barbeque Mortgage Advice

The best mistake has been saved until last.

We’ve all been there, standing around the barbeque, drink or sausage in hand, when Uncle Barry starts blabbing about mortgages and interest rates like he’s the Reserve Bank Governor. He’ll tell you how he “smashed” his mortgage in record time back in the ‘90s or proclaim how "In 1987, we locked in an interest rate of 18% and it was gold! You kids don't know how good you've got it!"

The problem? Mortgage markets change. Interest rates fluctuate. Loan structures evolve. What worked when Uncle Barry had a Walkman might not work for you today. Plus, let’s be honest — Uncle Barry’s financial expertise is roughly on par with his ability to cook a steak properly (burnt outside, raw inside).

A mortgage is one of the biggest financial commitments you’ll ever make, so taking advice from someone whose credentials include “homeownership” and “talks loudly” is a risky move. Instead, talk to a mortgage adviser. Best of all, their advice is usually free — unlike the financial clean-up job you might need after following Barry’s barbeque wisdom.

The Bottom Line, Costly Mortgage Mistakes to Avoid

Most people treat their mortgage like a set-and-forget power bill. But small mistakes — like sticking with the same lender forever, ignoring refixing options, or trusting Uncle Barry’s barbeque finance wisdom – can cost you thousands.

Avoiding these common mortgage blunders can mean the difference between paying off your home faster or handing over a small fortune in unnecessary interest. Let’s make sure you’re in the first group.

If you’ve read this far you might benefit from an obligation-free chat with one of our mortgage brokers (“mortgage advisers”), leave your details here and we’ll be in touch within a workday.