You may not realise it, but there’s been a quiet revolution taking place in the Mortgage industry, which is not necessarily recognised by everyone.
These days, most people still seem to view a Mortgage as a long term commitment they have which will take the better part of two decades or more to repay. It forms the foundation of a relationship they build up over time with whichever Bank they have chosen. Obviously, given that these loans are usually written for a 30 year term it’s a natural assumption to make that it’s a long term deal.
However, as someone who deals with Mortgages every day, I’m seeing a very different approach emerging, which has been taking place for a while.
I believe Mortgages are now being viewed by many as more of a short term product, much like a Personal Loan.
You may wonder how can this be possible, given the difference in terms between the two, but the facts speak otherwise.
It could come as a bit of a shock to learn that the average mortgage these days is actually repaid within 4 to 7 years. That’s right, 4-7 years! Now that’s much less than the 30 year term they were originally written for. (For comparison, it’s interesting to note that a personal loan usually has a maximum term of 5 to 7 years.)
Now before you throw your arms up in disbelief at this comparison, I want to be perfectly clear on what repaid actually means in this instance. Repaid doesn’t have to mean that a loan has been paid off in full by the borrower’s own money, because it can and does include a number of methods.
What the Lender actually means by repaid is that the loan is gone from their loan books in that timeframe. It may be because the loan was refinanced, or repaid because the property was sold for example, in which case the loan is still gone from their loan books. That equals repaid. If that’s the case, then logically it follows that anyone who is still hanging onto their mortgage for longer than 5 to 7 years is now actually in the minority. Amazing isn’t it?
So how does this affect me, you may well ask.
It happens like this. Every time you refinance a mortgage you get a brand new deal with new conditions and pricing. The previous deal is finished. The new one is not an extension of the old one, it’s brand new one. Which means you could get lower rates, better options like Offset for example, or maybe a Fixed rate with unlimited repayments. Naturally, you take whatever loan suits your circumstances at the time you are ready.
I’m not talking about someone staying with the same Bank and getting more money. I’m talking about moving from one Bank to another.
I also think it’s important not to confuse debt with product. The debt may remain as you go through several different mortgage products. The change of product is usually done to reduce or repay the debt faster by lower rates, more favourable conditions or to access other products within the range, like Offset and Redraw. It could also be done simply to create a debt for another purpose such as a new property.
Let’s face it, a mortgage is designed primarily to do one thing. Buy us a house to either live in or rent out as an investment. Without a property you can’t get a mortgage. These days, in the case of an owner occupied home, it’s unusual for someone to stay in the same house for 30 years AND have the same loan. It’s also VERY unusual for someone to buy an investment property and have the same investment loan for 30 years. In fact it would be inefficient and unprofitable to do that.
Naturally, most people move Banks because their circumstances change. They get married, have families, divorce, change jobs, downsize, retire, although not necessarily in that order. People are changing lots of things these days, improving their financial position as often as they can.
To keep up, Banks have transformed the traditional mortgage from a cumbersome long term product into a flexible, cost efficient and accessible facility with numerous add-on options available. Most Banks will push the fact that “their” loan will help you to pay off the debt faster by selecting certain options. Of course, they understand that you will sell and repay the debt but they also hope that you will borrow again using their product. That’s where marketing comes in.
In addition to the Lenders adapting to the changing requirements of its customers, Legislation banning Exit Fees has made moving from one Lender to another easier than ever.
So if the life of the average mortgage is now 4 to 7 years then naturally there is no way that we can classify a mortgage as a long term commitment any more. It has become one more commodity to be consumed on a regular basis then changed for something new when the need arises. Rather than having one mortgage for 25 years like our parents and grandparents did, we can change the product as often as we like to get the result we want.
Mortgages have changed a lot over time but perhaps it’s our perception of them that is still firmly fixed in the past.
When was the last time you thought about trading in your old, worn out mortgage for a shiny, brand new one? If you’d like to see how shiny the brand new ones are, please contact me, firstname.lastname@example.org I’d be happy to show the range that’s available.