July 19, 2016
Whether you have an existing mortgage or have been thinking about purchasing your first property, it’s likely you’ve heard the following home loan myths and misconceptions being bantered around.
By knowing fact from fiction, you can make smarter decisions that could save you thousands on your home loan. Here we get to the bottom of many common myths borrowers ask us about.
1. Refinancing is too expensive
Due to the competition among lenders, you may be able to find a better loan with lower fees and interest rates by refinancing. Many home owners, however, are reluctant to consider this because they are worried about high exit fees. While you do need to pay break fees for a fixed-rate loan, variable home loans are a different story.
After exit fees on variable loans were banned in 2011, refinancing has never been more affordable and is something you should consider every two or three years. Even finding a loan that’s half a percent cheaper will save you thousands or even tens of thousands of dollars over the life of a loan.
If you do have a fixed-rate loan, you will need to compare the cost of break fees versus the savings you stand to make by refinancing. These calculations can be complex, but we can analyse the costs over the life of your loan for you. Due to the break fees associated with fixed-rate loans, it’s a good idea for property owners to review their loan at the end of every fixed term.
2. Introductory interest rates are a good deal
Some lenders will try to get you in the door with a low introductory interest rate. While these deals seem like a great way to get your foot on the property ladder, you need to read the fine print.
When the honeymoon period winds up, it’s likely you’ll be paying a higher interest rate than you would be on a standard home loan. To avoid ending up in this position, look at the cost of the loan over the long term and compare this with the cost of other loans.
3. Lenders mortgage insurance is protection for borrowers
Any type of insurance on a loan sounds like a good idea, but lenders mortgage insurance does not offer borrowers any protection. Also known as LMI, this insurance actually protects the lender, not you, and is applied to any loans taken out without a 20% deposit (that’s another myth – that you need a 20% deposit to apply for a loan).
Lenders charge LMI because borrowers with a deposit of less than 20% pose a higher risk than those who have managed to save this sum. If you are in this situation and you default on your loan, there is likely to be a discrepancy between the sale price of the property (which may be lower than market value in the event of a forced sale) and the sum of your debt. LMI offers lenders protection against this.
It’s not a good idea to wing it once you have a home loan. Most people won’t be able to maintain mortgage repayments if they were unable to work, so taking out the right level of insurance protection should be one of the first things you do after having a mortgage approved.
4. You need to pay to use a mortgage broker
Using a mortgage broker is convenient, as we take on a lot of the heavy lifting when applying for a home loan. A broker can compare hundreds of loans and lodge and manage your loan application, saving you a lot of time and stress. This is beneficial not only when purchasing a home, but also when it’s time to look at refinancing.
So what’s the catch? There is no catch. Our service is free because we are paid by the lender, not borrowers. This means you can access professional advice without paying any fees to us or the lender.
At Mortgage Choice, we are paid the same rate no matter which lender we suggest, so you know we are always recommending the loan that’s best for you.
5. You are better off saving your money rather than making extra repayments
Your home loan repayments will likely be the biggest expense in your budget, so it makes sense that you’d want to save your money for other things. But the reality is that your money can work hardest for you when you put it towards your home loan (unless you have other investments). There are a few ways you can do this.
By setting up an offset or a redraw account with a variable home loan, you can ensure that any extra repayments you make are accessible if you need the funds in future. While the extra money is sitting in these accounts, it is reducing the amount of interest you pay on your loan.
One of the easiest ways to make extra repayments is to pay your loan off fortnightly rather than monthly. Let’s say your loan requires you to pay $2,000 per month, which comes to $24,000 annually. There are 26 fortnights in a year, so if you make a $1,000 repayment every fortnight, you’ll end up paying off $26,000 for the year. This tactic can shave years off your loan. To work out how much you could save, use the Mortgage Choice fortnightly repayments calculator.
Finally, when rates fall, maintain your current repayments. Unless you really need the money for other things, this is one of the simplest ways to get ahead on your home loan without affecting your regular budget.