If you’re buying a home, chances are you’ve been given advice from family and friends on how to get the best result from your home loan.
Being a mammoth financial decision with many nuances, chances are you’ve encountered a myth or two. Here are some of the most common misconceptions experts find themselves dispelling.
Mortgage brokers are incentivised to choose particular loans, despite it not being in the best interest of their client
It’s definitely a myth.
Brokers are paid by the home loan provider, like a bank, not the homeowner. However, this payment has traditionally taken shape as an upfront and trail commission set by individual providers, therefore a broker may receive more money selecting a particular provider.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry handed down that brokers must adhere to a “best interest duty” which required them to put their customers first.
This was meant to come into effect on July 1, 2020, but due to the advent of the COVID-19 pandemic, it has been pushed back to January 1, 2021. However, there are brokers who are already adhering to the duty.
You can’t refinance a fixed-rate loan
A common misconception that a homeowner can’t refinance their fixed-rate loan.
While it’s entirely possible, it will incur extra costs known as fixed-rate break costs which can put homeowners off the process.
The costs can range from $500 all the way up to $20,000 to $25,000 in some cases.
These fees are calculated on a number of factors and change daily. This includes how much is owing on your loan, how long is remaining on your fixed-rate period, and the difference between your current fixed interest rate and the lender’s current fixed interest rate for the same product.
Weigh up the options because sometimes it can worth paying that break fee.
It’s harder to get a home loan if you’re self-employed
It is harder to get a home loan if you’re self-employed, but only if you don’t know what you’re doing.
Banks do go into more depth with your application and there were more hoops to jump through if you were self-employed.
Most banks and lenders want your business to have been trading for a minimum of two years and be able to provide two years of financial documentation around the business to help support the income, If you’re only able to provide six months of bank statements, it can be quite difficult to get a home loan.
If you meet all the other requirements, there are other things you can add back to your income so you can service a loan better. There are things like director wages, asset depreciation costs, interest expenses, excess superannuation you pay yourself.
Talk to a home loan specialist to get a second opinion too.
You should always take the lowest interest rate available to you
It’s often a key motivation when refinancing: securing the lowest interest rate possible to save money on your repayments. However, it’s a dangerous myth to follow as the lowest interest rate available may mean compromising on other crucial features of the loan product.
For example, the loan product may have the lowest interest rate competitively, but it could be for a fixed-rate loan rather than a variable which may not suit you as a borrower.
A good credit score guarantees loan approval
A credit score is one of many aspects a lender takes into consideration when approving a loan, and will never guarantee an application will be approved. It’s probably one of the most important of them, however, a credit score with bank A will be different to a credit score with bank B. It can often be a minefield.
Lenders look at “Four Cs of Credit” when considering a home loan application.
The first is character – which is where a lender wants to see strong credit history.
Second is capacity to pay back a loan – They’ll look at your income and expenses to see if you can repay the loan you apply for.
The third is capital – This is where the bank assesses your equity or deposit to show you’ve been good with your money and you have a strong asset position behind you.
The fourth is collateral – where the lender assesses the type of security tied to the loan. This involves reviewing the property and postcode itself to ensure it’s a secure investment.
The interest rate set by the provider reflects the cash rate set by the Reserve Bank of Australia (RBA)
The cash rate is a metric set by the RBA on the first Tuesday of each month which dictates how much interest banks pay on the money they borrow. Changes to the cash rate influence interest rates set by the banks. However, if you see a change in the cash rate this does not mean your home loan provider is guaranteed to follow suit and adjust your home loan interest rate.