All of us have heard and been told many things about home loans. While some of these will be true, many will not. For anyone looking at taking out a loan, but for first home buyers especially, it's particularly important to split fact from fiction. So, over the next two columns I'll debunk 20 of the bigger mortgage myths you might have come across.
Myth #1: The lowest rate is the best rate
Truth: The headline rate might look good, but there could be strings attached such as higher fees and lower flexibility, or the cheap rate might only last for a set period of time. The key is to work out what product type and features best suits your lifestyle and financial needs and objectives first and then focus on cost.
Myth #2: A fixed rate loan is better than a variable rate loan
Truth: Actually, similar to the above, the fixed vs. variable decision simply depends on which type of loan best meets your needs. Fixed loans provide repayment certainty and can save you money if interest rates rise (or lose you money if rates fall). But they can also be costly to exit during the fixed rate term and they lack the flexibility of variable rate loans.
Myth #3: Paying the minimum loan repayment each month is the way to go
Truth: If you want to reduce your interest costs and get your loan paid off as fast as possible paying more than the minimum repayment each month is a great strategy. The interest you owe is calculated daily and charged according to your repayment cycle, so the more you pay off the more you'll save, especially in the first few years of your loan. But, if this is a strategy you're considering make sure your lender allows for repayments above the minimum or for lump-sum payments without penalty.
Myth #4: Before buying a home, a deposit is all I need to save for
Truth: There are plenty of other costs to save for including government stamp duties and charges, lender's fees (including Lenders Mortgage Insurance) and other miscellaneous expenses such as legal, inspection and moving fees - all of which can add between 3% and 7% to the purchase price. On a $400,000 home, this could amount to between $12,000 and $28,000 of extra costs you'll have to budget for.
Myth #5: Lender's mortgage insurance (LMI) protects me
Truth: LMI simply protects the lender in cases where borrowers are repossessed and their properties are sold for less than the outstanding amount on their loans. But this doesn't mean that borrowers can escape their obligations: most home loans are recourse loans, meaning that borrowers will be pursued for any shortfalls, regardless of whether the lenders have been paid out under LMI.
Myth #6: I can always roll my other debts into my mortgage
Truth: You can consolidate your credit card, car loan and other personal debts into your home loan, but only if the loan's terms allow for it and you have sufficient equity in your property. If this is something you're considering, don't forget to weigh the benefits of moving to a lower rate against the fees, legal and other costs that will stem from the transaction.
Myth #7: I can save money by extending my loan term
Truth: While extending your loan term will reduce your monthly repayments, it will significantly increase the total interest costs of your loan. To meet affordability criteria, some lenders or brokers may suggest you extend your loan term, but what you're really doing is adding years to when your home will be yours debt free and increasing your borrowing costs.
Myth #8: To get a loan, I need to visit a lender branch
Truth: While you can go into a branch, there are many other ways you can arrange to get a loan. For instance, you can apply online, over the phone, by post or arrange for a mobile lender to visit at a time that suits you. Alternatively, you can by-pass the lender altogether and use a mortgage broker who'll handle all the negotiations with the lender on your behalf.
Myth #9: Non-bank lenders aren't as good as the banks
Truth: Non-bank lenders, including wholesale-funded lenders, building societies and credit unions, can and do provide services as good as and often better than the banks. If they take deposits, they're also regulated by the Australian Prudential Regulation Authority in the same way as their much bigger banking cousins. To get the best deal you should cast your net as wide as possible and include non-bank lenders in your search.
Myth #10: Borrowing at high loan-to-value ratios (LVRs) is okay, as long as I get the loan
Truth: Buying a home whatever the costs is never a good idea. Remember, the higher the LVR the less equity you have, meaning if you get into financial difficulties while mortgaged to the hilt your options for sorting things may be significantly limited. And remember, only borrow what your can reasonably afford to pay back. The last thing you want is to become as slave to your mortgage.
In my next column I'll take apart 10 more home loan mortgage myths every borrower should be wary of.
Have you encountered any of the misconceptions detailed above? Are there other home loan myths you'd like to warn of? (Share your views below).
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Peter Boehm's first book The Great Australian Dream: A Guide to Buying Your First Home is now available. It discusses the numerous challenges Australians face in entering the property market and provides straightforward advice, hints and tips on getting past them.
