There is a lot of inaccurate information that surrounds home loans, eligibility and property finance. In some instances it is these inaccurate facts or myths that prevents some first home buyers from entering the market. Let’s look at the most common myths in greater detail, so you can distinguish fact from fiction.
Myth 1 – If You’ve Got a Bad Credit History You Cannot Buy a Home
A bad credit doesn’t mean that you cannot buy a home, but it does mean that you may have to apply for a home loan with a specialised lender. In addition, if you are successful at gaining a home loan you may also have to pay a higher interest for a number of years so your lender can determine whether or not you are a high risk.
Myth 2 – Bad Credit Won’t Affect You if You Pay Off Your Bad Debt
Your bad credit history, where you’ve defaulted on payment, will remain on your credit record for 7-years. If you wish to apply for a home loan your credit history is one of the first records that a lender will check. They want to ascertain what type of risk you are before they lend you money. If you want to avoid home loan rejection then be up-front about your credit history so you can find a specialised lender. Your other option is to wait 7-years, from the date of your default, until you apply for a home loan.
Myth 3 – Assets and Income are the Same
While assets can help you to secure a home loan, they cannot repay the loan unless they’re sold. A lender, by law, has to make sure that you can afford home loan repayments without financial hardship. This means that they have to ensure that the income you have coming in can cover the cost of regular home loan repayments without you having to sell your assets.
Myth 4 – All Credit History Blemishes are the Same
Many borrowers believe that all bad credit records are treated the same, but this is not the case. For instance, paying a telephone bill of $200 3-days late is not going to deter a lender, but they may ask you about it. In fact, most one-off late payments of under $2,000 don’t deter lenders. It is when these bill payment defaults occur regularly and add up to thousands of dollars that a lender becomes concerned. So if you have repeatedly not paid your bills, and these have accumulated, then this may affect your home loan approval.
Myth 5 – Lenders Don’t Want to Know the How’s and Why’s
Most lenders know that there are certain events in life that have a profound impact on financial situations, so if you have a bad credit record that has resulted from a death in the family, a marriage breakdown, severe illness or a job loss, then tell your lender. This situation may have been a one-off and you may now be financially stable and able to prove your claims.
Myth 6 – The Limit of a Credit Card Doesn’t Have an Impact on Your Home Loan, It’s Only the Balance
Both the limit of your credit card and balance owing can have an effect on your ability to secure a home loan. Your balance will need to be zero or extremely low, and your limit needs to be no more than $2,000. This is because your credit card limit will reduce your borrowing power by $4,000 per every $1,000 of your limit. For instance, if you have a credit card with a $10,000 limit, then this can reduce your borrowing power by $40,000.
Myth 7 – You Need a 20 Percent Deposit to Buy a Home
A 20 percent deposit is ideal and will allow you to avoid paying lenders mortgage insurance. However, there are lenders who will lend you up to 95 percent of the value of your home when buying a property. This means that you don’t have to save as much and can get into your own home faster.
Myth 8 – The Cheapest Home Loan Rate is the Best
When it comes to home loans the lowest rate is not always the best. Many loans are advertised as being very low, however when you look at the fees and charge these can be high and add thousands to the cost of your home loan. To ensure that you’re getting the best deal ask your lender for the comparison rate of the loan you’re interested in as this includes all fees and charges.
Myth 9 – Fixed Rates are Safer than Variable
All home loans are different. Fixed rates give you peace-of-mind when budgeting, but they incur break-fees and other costs if you exit your home loan before the end of its term. Sure variable rates fluctuate, but you can save long-term when rates go down, whereas if rates drop and you’ve got a fixed rate then you’re locked into paying more.
Myth 10 – Offset Accounts Save You Money
An offset can save you money if you use it effectively. If, however, you have poor spending habits and you don’t leave money in your main account, then the offset account is of no benefit.
Myth 11 – Don’t Pay More Than the Minimum Off Your Home Loan
Pay as much off your home loan where possible. This will reduce the interest that you pay back to the bank long-term and it will mean that you’ll save, especially when interest on your home loan is calculated daily, and then charged monthly, over the term of your home loan.
Do you want to know more about home loans? Then contact eChoice, we can help you find more home loan facts and avoid the fiction.
Written by eChoice
Since 1998, eChoice has helped more than 50,000 Australians secure a home loan through its network of over 25 lenders and hundreds of loans. Best of all our service is cost and obligation free!