12 HOME LOAN MYTHS EXPOSED
If you are looking to apply for a home loan it is important you get the facts straight. Let’s uncover 12 of the most common mortgage myths below.
1. You need 20% deposit to buy a property
If you have less than a 20% deposit, you can still buy. Some lenders will allow you to buy with as little as a 5%. However, if you’re borrowing with less than 20% deposit or equity, Lenders Mortgage Insurance may be required.
2. You must have a deposit to get a home loan
If you don’t have enough deposit but do have the ability to make the required home loan repayments, a guarantor (such as your parents) could help you.
With your parents’ help, you can borrow 100% of the purchase plus purchasing cost including stamp duty and conveyancing fees.
It is important to note that a guarantor’s ability to borrow will be reduced after they have agreed to act as a guarantor therefore it is recommended to seek independent financial and legal advice beforehand.
3. It doesn’t matter how many credit cards I have, as long as they are paid off
When it comes to credit cards, your total credit card limit will be assessed, even if you don’t have any money owing on it. Lenders assume that a credit card is used up to its limit even when it isn’t so, if you have credit card that has a $0 balance and you don’t use it, cancel it. If you must then keep one but reduce the limit as much as possible as it will help your borrowing power substantially.
4. Paying fortnightly saves a fortune
You’re actually making extra repayments if you pay fortnightly as there are 26 fortnights in a year compare to 12 monthly repayments, meaning two extra repayments per year if you pay fortnightly.
Through those extra repayments, you can pay off your mortgage faster and save heaps on interest. You can pay monthly and just make extra repayments to get the same effect.
5. I only need to save for a deposit
Having a deposit ready for that property is just the start of the costs needed. There are some extra costs all buyers should be aware of. Other purchase costs you will need to save for include:
- Stamp duty
- Solicitor and conveyancer fees
- Building & Pest inspections (optional)
- Lenders mortgage insurance (if you borrow more than 80% of the purchase price)
- Loan application and establishment fees
6. LMI protects the borrower
Lenders’ mortgage insurance protects the lender in the unfortunate event of you defaulting on your home loan, not you as the borrower.
Understandably there is confusion as the borrow needs to pay this. If you want to be insured as a borrower, then you can consider getting mortgage protection insurance.
You will usually only have to pay LMI if you borrow more than 80% of the purchase price and the more you borrow, the higher the LMI fee will be.
7. I’ve found the cheapest rate so I never need to worry
Lenders often use discounted, introductory or honeymoon offers to get customers in the door. Once the special rate is over, the revert rate is often much higher. It’s important to remember, lenders can move their variable rates at any time so a loan that’s competitive today might not be as competitive in a couple of years’ time. Make sure you review your loan every year or two to ensure that your rate is still competitive.
8. I won’t qualify for a loan. I have bad credit
You can still apply for a home loan and get approved with bad credit. Banks and lenders will always look at your credit history and rating when deciding whether to approve your loan application. If they understand your intentions and can see evidence that your days of living in debt are behind you then a specialist lender may be able to help.
9. The best home loan has the lowest rate
Not necessarily.
Whilst a low interest rate home loan may be able to help you save money, it’s not the only cost you need to consider. There are other cost you need to factor in such as set-up costs, exit fees, monthly charges and other ongoing fees which will significantly affect the amount that you pay for your mortgage.
This will vary depending on the lenders product and what your intentions are. You may want so, before choosing a home loan, take a look at your own financial needs and goals and see which product would suit you best rather than focusing on the one with the lowest interest rate. For e.g. you may want a lender that gives you an offset account or allows you to borrow more/less.
10. I don’t need an income if I have assets
Whether you have a number of assets or not, you cannot be approved for a home loan on assets alone. Lenders complete a holistic assessment to meet all of their criteria, including reviewing your credit history, loan purpose and well as income to see that you have a regular income source to meet the repayments. Your income is key to help determine how much money you are allowed to borrow.
11. Interest only repayments are bad
An interest only mortgage is particularly good if your budget is tight or if you want to free up cash to allocate to more important or exciting goals – like building an investment portfolio!
It’s more beneficial for Investors as they can claim interest as a tax deduction or for those who plan on holding onto the property for a few years before selling. It depends on what you’re trying to achieve so make sure your mortgage broker offers the right product and lender.
12. You have to pay the broker to lodge and manage the loan application
The majority of brokers don’t charge any fees because they are paid by the lender.
Using a mortgage broker is one way to streamline the research as they will have access to a wide range of loans from different lenders and understand the home loans market. This doesn’t affect your interest rate or fees and can generally get you a more competitive loan.
If you don’t have a mortgage broker or are looking for a second opinion, please feel free to call on 03 8390 5855 or email mitesh@thinkandgrowfinance.com.au