Discerning between the truth and fiction of financial advice is one of the hardest lessons to learn. What is an incontrovertible truth for one person can be a major path to despair for another? Here are some myths about home loans, inspired by Peter Boehm.
The lower the interest rate the better on home loans
It makes so much sense to sign up for a home loan with the cheapest rate. But a bit of cynicism won’t lead you astray- why is it so cheap? Are there strings attached, or high fees hiding somewhere? Work out what features of a home loan are a must for you- to suit your lifestyle, your financial goals and objectives, then look at the numbers and learn about the comparison rate urgently. Learn the difference between a headline rate and a comparison rate.
Fixed interest home loan VS variable
Again, there’s no tried-and-true in this situation. If you need flexibility, maybe a fixed rate isn’t the best option for you. On the other hand, if you need certainty and want to be able to budget for the next 10 years on a certain repayment rate, it might be a good idea to sign up to a fixed rate. You’ll have to bear the risk of paying extra should interest rates drop, just as someone who is variable will have to face the risk of high-interest rate jumps.
Paying the bare minimum on your home loan
Another hotly debated home loan topic. Some people say that the home loan is the cheapest loan you get, and you should stick to your minimums and invest your money elsewhere. Other people calculate the cost of interest and suggest paying off the mortgage as fast as possible to save money. The choice is up to, and what suits you best financially. The important thing is to know what you would prefer and to check whether the lender allows extra payments before signing on.
Perhaps look at some strategies to help your pay off your mortgage faster.
A home loan deposit is all you need
Scraping together the deposit can be hard enough, but it’s important to have extra money up your sleeve for other costs. You don’t want to be kicked in the teeth unprepared by stamp duty, or maintenance costs, legal costs or inspection fees. Save up enough money to bolster your through all that- it might delay your purchasing plans a couple of months, but it will help keep you out of a debt spiral.
Combining your other debts into the home loan
You can consolidate all your debts, and it could be a great approach to tackling debt as a whole. First, however, you have to be sure that your home loan allows for it, and your property has to have enough equity. Make sure you understand the full costs of rolling them all together before doing so.
Remember, you are in most cases extending your debt over a longer period of time, in turn paying more interest. If you do roll your debts into your home loan – have a plan to repay urgently and not last the full term.
Extending the time on your home loan
I’m from the get-rid-of-debt-fast side of the fence. A lot of people would disagree. They would suggest that extending your loan would allow you to save money with reduced mortgage repayments. While that may be true, the extra interest that will accrue in that period might make it all a redundant endeavour. Whatever you choose, just ensure you’ve weighed up all the finances and worked out what will help you to be financially secure in the future.
Only sticking with the big banks for your loan
There’s a weird discourse floating around the banks at the moment, with NAB advertising how it ‘broke up’ with the other banks as if they were a couple. Funny briefly, but what’s funnier (or, perhaps, just more apt) is a sign I saw on a credit union stating “While all the banks are breaking up with each other, we’re going to be looking after you”. Bam. Other kinds of lenders can be as good as the banks, and if they take deposits, they’re also regulated by APRA. So don’t just go Big 4 immediately. Do some research about who is going to suit you the best.
Don’t settle for a mediocre loan
There are ghost towns all across America which are a testament to how false this misconception is. Property is important, and it’s easy to feel that you are missing out and you just need a house at any cost. But taking any kind of loan, at any kind of price, regardless of the value of the house you are buying is never going to be a good idea. You have to be able to borrow an amount that you can reasonably pay back.
It’s the lenders responsibility to ensure I can afford my repayments
Again, the kind of thinking that will get you into a tad bit of trouble. You know your finances better than anyone. You might hope that you didn’t, you might lie to yourself about it but at the end of the day, you know whether or not you can afford a loan. It’s a mutual responsibility, on behalf of yourself and the lender to ensure that you can pay back the loan and they don’t get hard done by.
It doesn’t matter where the deposit came from
This was a misconception I ran with for a long time. Contrary to popular opinion, if you’ve been partying it up and spending every time and suddenly inherit a deposit, you might still not get approved for a loan. Lenders don’t want to know what you do with a lump sum gift, they want to know if you can save and budget because they’re looking at 30 years of repayments and no one on this earth gets that many gifts.
Credit card limits don’t matter
I don’t pretend to understand the nuance of credit ratings, but this is a great piece of advice from Peter Boehm. Lenders don’t just care about how much money you’ve spent from your credit card, they care about your limit. The reason being that you could realistically spend up to your limit, thereby hampering your ability to pay back the loan. It’s a good reason (well, one good reason among many) to lower your limit.
In fact, decreasing your credit limits will increase your borrowing power.