Applying for a loan can sometimes feel overwhelming. With literally hundreds and hundreds of loan products to choose from and each product outlining different terms and conditions, it’s only natural for mortgage myths to rise.
In this article, we’ll debunk five of the most common ones.
Myth 1: You need a 20% deposit to buy a home.
Many buyers assume that if they don’t have at least a 20% deposit, they can’t get a home loan.
Maybe back in the day, but times are changing, and there are a few options for those who haven’t reached that magical number:
Lender’s Mortgage Insurance (LMI)
Most lenders like to limit their exposure to a loan-to-value ratio (LVR) of 80%. That’s where the 20% figure comes from. If you don’t have a 20% home loan deposit, some lenders will give you the option of paying for LMI. LMI might be a helpful tool, allowing you to borrow up to 95% of the value of a property, meaning you only need to put five per cent upfront.
Guarantor home loans
Guarantor home loans are suitable for those who cannot secure the total loan amount by themselves.
A guarantor is usually a close family member who can help secure the home loan by agreeing to take responsibility for making repayments if the borrower can’t. Guarantors home loans are an excellent option for borrowers with low incomes, bad credit histories, or who are struggling to save for a deposit.
Government grants and schemes
First Home Loan Deposit Scheme (National) Eligible first home buyers can purchase a home with a deposit of as little as 5 per cent.
Homebuyer Fund (Victoria): eligible home buyers can receive a contribution of up to 25% of the purchase price of their home.
First Home Owner Grant (National): a one-off lump-sum payment is payable to first home owners that satisfy all the eligibility criteria.
As you can see, there are plenty of options to be explored if you don’t have a 20% deposit.
Myth 2: A pre-approval is a guarantee you’ll get a loan.
Unfortunately, not really. Pre-approvals are only an indication that your application fits the lender’s criteria. There are a few reasons your loan application might be rejected, even after being pre-approved:
- Changes to your personal or financial circumstances
- A negative valuation of the property (high-risk areas, inflated prices, etc.)
- Changes in interest rates
Myth 3: Rates are the most important thing about your mortgage
Lower rates are great, but they’re only part of your mortgage. Sometimes the loans with the lowest rates sacrifice handy features that could save you money in the long run. For example:
Offset account
This is a separate account that lets you use the balance to offset the principal on which your interest is calculated. Simply having your pay packet deposited into this account can take time off your loan.
Flexible payments
Paying some more money into the loan if you have it is a great way to shorten your loan and save more in the long run.
Redraw
This lets you easily access any extra funds you’ve deposited into your loan.
Flexible rates
Some loans allow you to split your repayments into fixed-rate and variable-rate components. This sort of loan lets you enjoy the benefits of an interest rate drop and also protects you from being fully affected if they rise.
Each lender will have its own terms and conditions, offering some of none of these features.
Myth 4: Lenders mortgage insurance (LMI) protects you if you default.
LMI might be the only insurance you pay that you won’t see any benefits. It’s an insurance designed to protect the lender, not the borrower.
A bit of a bummer, right?
Not really; as we’ve explained above, LMI can be a helpful tool for you to buy a home sooner.
And what a lot of people don’t know is that if you repay your home loan within two years of the settlement or drawdown date, you may be entitled to a partial refund of the LMI fee depending on the agreement you have with your lender.
Myth 5: The deposit is your only upfront cost
While that’s probably one of the most important steps of the process, there are other just-as-important-things you need to consider when saving to buy a home:
Stamp duty
It is a tax on a property transaction that is charged by each state and territory. The amounts can and do vary. The stamp duty rate will depend on factors such as the property’s value, if it is your primary residence and your residency status. Our stamp duty calculator shows if you will need to pay stamp duty.
Moving costs, utility connection and furniture
Moving costs can vary a lot depending on your location and how big your house is. On average, it will cost between $12-90 to connect electricity. It’s essential to do your own research to determine how much these services will cost you.
Inspections and legal fees
Getting help from a solicitor or conveyancer to review the contract before signing and getting a building and pest report done by a professional are a must. This could save you a lot of money down the track.
Emergency buffer
According to financial advisers, a buffer of three months of expenses is a good short-term savings goal in case something goes wrong.
Applying for a loan can seem like a daunting process. But it won’t be with our help. We’re here for U. Talk to a broker today.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced, or republished without prior written consent.
