Debunking common mortgage misconceptions
The process of getting a home loan can be complicated, so it’s no surprise that there are many common misunderstandings. We’ve put together a list of the most common misconceptions.
1. LMI will protect me from defaulting
Although you’re the one paying it, LMI isn’t there to help you. Wondering what you were paying for? Well, the clue is right there in the name – LMI, also known as Lenders Mortgage Insurance protects the lender if you are unable to make repayments.
2. I can’t get a loan if I’ve got bad credit
It definitely can be harder to get a loan when you’ve got a bad credit history, but that doesn’t mean it’s impossible. Getting a home loan may even help you consolidate your debts and get yourself in a better financial position.
A broker can help you find a lender that is willing to work with you and your situation. You will likely find yourself paying a higher interest rate, but you’ll be putting yourself on track to better managing your money.
3. I’ll pay higher rates if I’m self-employed
Not necessarily! Your ability to get a loan with a good market rate is entirely dependant on how much information you can provide to the lender. As long as your statements and tax documents are all in order you will be able to access the same rates as anyone else.
4. I won’t be able to get a loan without a 20% deposit
A 20% deposit is the gold standard, that much is true. But not having a 20% won’t lock you out of the market. It’s common for lenders to offer loans up to 90% LVR, and in less common cases even as high as 95% or 100%. The lower the deposit you have the more likely it is that you will be required to pay LMI, but even this can be avoided with a guarantor.
5. Smaller lenders are a riskier option
Regardless of their size, all banks are required to follow the same rules and regulations. You might find that smaller lenders have better deals or less strict lending criteria than the big 4, making them a better fit for you.
6. If I get a fixed-rate loan I won’t be able to refinance later on
A fixed-rate loan can feel like a safe choice, and knowing how much your repayments are going to be can make financial planning a whole lot easier. But if your rate is no longer competitive that’s just something you’ll have to deal with, right? Nope! Refinancing while you’re on a fixed rate will incur a break fee, but it can be done. It’s worth weighing up the costs versus the potential savings if you’re thinking of refinancing.
Many borrowers opt for a split loan to get around this potential problem. Split loans offer the best of both worlds – a pre-determined fixed-rate period that guarantees consistency of repayments, and a switch to a variable rate after that period ends, keeping your rate competitive and making it easier to switch lenders.
7. Getting the lowest interest rate should be my top priority
A low rate shouldn’t be your biggest goal when looking for a mortgage. Of course, it is important to avoid paying more than necessary, but other factors such as an offset account, early repayments, higher LVR, or free redraw could end up saving you more over the life of your loan that the lowest rate could.
8. Credit card and loan debt are the only debts that will affect my ability to get a loan
When considering debts that affect your chances of getting a home loan there are two big contenders that often go overlooked – BNPL service, and student loan debt.
That’s right, your HECS/HELP loans can impact your borrowing power, and depending on the lender they can be assessed the same way as any other debt.
BNPL, or Buy Now Pay Later services are another debt that often sneaks up on potential borrowers. While things like Afterpay and Zip seem harmless enough, they are technically debt, and your lender will treat them as such when assessing your financial situation.
9. Having a low income doesn’t matter if I’ve got plenty of assets
Even if you already own other properties you may still find it difficult to get even a moderate-sized loan. This is because, regardless of the size of your assets, lenders still require you to meet certain specific criteria, and income is a big part of that.
10. Using a broker is more expensive than going to the bank directly
I’m sure you’ve heard this one before – using a broker is expensive, otherwise everyone would do it. But brokers get paid by the banks, and you’ll not often find yourself paying a fee to a broker directly. Of those fees that are charged, in most circumstances, you will get your fee back at the time of settlement. You’ll usually only find yourself paying if your loan is particularly difficult or time-consuming, or if you switch products within the first couple of years of settling with a broker.
