If you’re a first-time homebuyer, you might want to learn more about home loans to make informed decisions when entering the mortgage market. You could access several sources of information, from books, news, and blogs to experienced family members and friends. However, with so much information available, it can be challenging to distinguish truth from fiction. This is particularly true for first-home homebuyers who may not have a clear idea of the lending process.
To make your financing journey smoother, we decided to debunk nine common mortgage myths based on frequently asked questions from our customers. By dispelling these myths and providing the right information, we hope to empower you to choose the best loan for your needs.
1. A 20% deposit is necessary to secure a home loan
Although having a 20% deposit while shopping for a home loan is good, lenders can still approve you for a loan with as little as a 5% deposit.
Some lenders allow you to borrow a greater percentage of the property’s value if you agree to pay for Lenders’ Mortgage Insurance (LMI). LMI is a type of insurance that protects the lender against a loss if the borrower defaults on the mortgage. However, the cost of LMI could run into thousands of dollars, adding to your overall loan costs.
For some professionals, paying LMI to get approved for a low-deposit home loan may not even be necessary. If you’re a doctor or a lawyer with a good credit score and financial history, you may qualify for an LMI waiver on your home loan, meaning you can borrow up to 90% or more for a property without paying anything extra.
2. Renting a home is cheaper than buying one.
We can’t say this is strictly a myth, but it’s also not an absolute truth. Renting a home isn’t always cheaper than buying one in the long run. Renting a house may seem more affordable when you consider the upfront costs of purchasing a home. Over time, you could use the money you pay towards rent to pay down your mortgage and gradually build equity in your home. Remember to crunch the numbers and consider your financial goals before deciding on the right option for you.
If you can’t afford to purchase a house in an area where you want to live, you may consider rentvesting – which means buying where you can afford and renting where you want to live.
3. You can’t get a home loan if you’re self-employed.
Being self-employed can make getting approved for a traditional home loan more challenging, but you may consider other options. Some lenders offer low-doc home loans designed for borrowers with non-standard income, such as self-employed individuals, contractual workers, and freelancers.
Low-doc loans require less paperwork to establish your financial situation and repayment capacity. You can apply for a low-doc loan with self-certified income statements or your business activity statements (BAS) instead of providing regular payslips. A letter from your accountant may be needed to verify your income.
4. LMI will protect you in case of default.
Even though LMI is payable by you (the borrower), it only protects the lender if you default on your mortgage. Paying for LMI could help you by making you eligible for a loan with a low deposit. However, paying for LMI doesn’t mean the insurer will take over your home loan debt. You’ll still be responsible for any outstanding debt after the LMI claim has been made and settled.
5. Your credit card usage isn’t related to your home loan.
When you apply for a home loan, your lender will consider your credit history and your debt-to-income (DTI) ratio before approving your application. Your credit card usage affects both these factors.
Having a high credit balance or regularly carrying a balance on your card could negatively impact your credit score. Only making the minimum repayments on your card could land you into debt that you might find challenging to repay. Missed repayments also reduce your credit score, making it difficult for you to qualify for other types of credit.
Furthermore, your credit card usage also affects your DTI ratio. Your DTI ratio reflects how much of your monthly income goes towards paying off your existing debts.
Your credit card balance and monthly payments are counted towards your monthly debt payments. Carrying high credit card balances could thus reduce your DTI ratio, which may reduce your borrowing capacity or lead to your application getting rejected if your DTI ratio is six or more.
6. You can only get a home loan with a high credit score.
A low credit score could make getting approved for a home loan harder, but it’s not impossible. Some lenders offer home loans to borrowers with bad credit but may charge a higher interest rate to offset their risk. However, you should only consider this option if you’ve resolved your financial issues and can provide the lender with a reasonable explanation for your low credit score.
Even bad credit lenders assess your ability to repay the loan. They will usually only approve your application if your financial situation has improved and you can afford to comfortably repay the loan despite a low credit score.
7. You can’t switch lenders once you have a home loan.
Even though a mortgage term is up to 30 years, you’re not stuck with your current lender forever. You can switch lenders whenever you think it’s necessary – such as finding a better deal or terms that suit your needs. However, there may be costs associated with refinancing your home loan, and it’s important to crunch the numbers to ensure the costs don’t outweigh the benefits.
8. All home loans are the same.
Various types of home loans are available in the market, and it’s important to understand the different types of loans before choosing one that suits your needs.
Some of the common types of home loans available in Australia include:
- Variable rate home loans – Probably the most popular type of home loan in Australia, where the interest rate can fluctuate during the life of the loan based on market conditions.
- Fixed-rate home loans – These loans can protect you from rate hikes in the short term by allowing you to fix the interest rate on the loan for up to 5 years.
- Split rate home loan – An interesting option that lets you split your home loan into two parts – one with a fixed rate and the other with a variable rate.
- Investor loans – These are home loans designed for property investors with flexible features and the option of only paying the interest on the loan for a specified term.
- Construction loans – A home loan meant for people planning to build a house. This type of loan is drawn down in parts and could save you money in interest charges during the construction phase of the loan.
- Bridging loans – This type of loan can provide funds for a new property until your existing property is sold.
Apart from these options, there are several other home loan options and features you could avail of. A mortgage broker could help you find a loan with competitive rates and features tailored to meet your requirements.
9. You need a mortgage broker to get a home loan.
While a mortgage broker could help find the right loan for your situation, working with one is not mandatory. You could even approach a lender directly for a home loan. However, working with a mortgage could offer several advantages, including:
- Professional advice on home loan features, interest rates, fees and other aspects of the home loan process.
- Handholding during the application process, including preparing and lodging your home loan application in a timely manner.
- Access to competitive interest rates and discounts that lenders may not advertise.
If you’re looking for a home loan deal or want to understand more about the home loan process, you could get in touch with a verified mortgage broker for an obligation-free consultation.
By Vidhu Bajaj
Hashching Content Writer