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When buying a home, you are likely to be given advice from family and friends on how to get the best result from your home loan.
Since this is a mammoth financial decision with many nuances, you’ve likely encountered a myth or two. Here are some of the most common misconceptions that experts need to clear up.
Mortgage brokers have an incentive to opt for certain loans even though it is not in the best interests of their clients
“It’s definitely a myth,” said David Hyman, Executive Director of Domain Home Loans and Managing Director of Lendi, “but the truth is a little more complicated.”
Brokers are paid by the home loan provider, such as a bank, not the homeowner. However, this payment has traditionally taken the form of a prepayment and arrears commission set by individual providers, so a broker can get more money when choosing a particular provider.
The Royal Commission on Misconduct in the Banking, Pension and Financial Services Industries has reported that brokers must adhere to a “best interest rate” requirement that requires them to put their customers first.
This should come into force on July 1, 2020, but has been postponed to January 1, 2021 due to the emergence of the COVID-19 pandemic. However, there are brokers who already adhere to the duty.
“The entire industry will be protected from next year, but Lendi and Domain Home Loans have had protection for several years,” said Hyman.
“We are paid by the lenders, but there is nothing in our incentive structures or platforms that sets them apart.”
There are two different ways a mortgage broker can get their income – on a commission basis and a salary basis Domain home loans said Jake Ziegler.
“There are many brokers, for example commission-based brokers, who may receive certain incentives to refer a customer to a specific lender,” said Ziegler.
“With Domain Home Loans, however, we are salary-based brokers. We don’t get incentives for certain product lenders and that means we are completely unbiased in our recommendations. ”
You cannot refinance a fixed rate loan
Ziegler and Hyman agree that it is a common misconception that a homeowner cannot refinance their fixed-rate loan.
While it is perfectly possible, it does add an additional cost known as a flat-rate break fee that can deter homeowners from the process.
“They range from 500 to the highest I’ve ever seen, between $ 20,000 and $ 25,000,” said Ziegler.
These fees are calculated based on a number of factors and change on a daily basis. This includes the remaining debt on your loan, the remaining term of your fixed rate and the difference between your current fixed rate and the lender’s current fixed rate for the same product.
“Depending on what your interest rate is, it can sometimes be worth paying that break fee,” Hyman said.
“We recommended talking to a home loan specialist because it’s pretty nuanced. You can calculate the savings you will pay on your new interest rate compared to paying the interruption fee. “
As a self-employed person, it is more difficult to get a home loan
It’s harder to get a home loan when you’ve started your own business, but only if you don’t know what you’re doing, Hyman said.
“If you are self-employed, we really recommend that you seek out a home loan specialist as it can be quite complicated depending on the structure of your business,” he said.
Ziegler said that the banks had gone deeper with your application and that there would be more hurdles to jump if you were self-employed.
“Most banks and lenders want your company to have been in trading for at least two years and be able to have two years of financial documentation around the company to support revenue,” he said. “If you can only provide six months of bank statements, it can be quite difficult to get a home loan.
“If you meet all of the other requirements, there are other things you can add to your income to better serve a loan. There are things like director salaries, asset depreciation charges, interest expenses, excess annuity that you pay yourself. “
You should always choose the lowest interest rate available to you
When it comes to refinancing, it’s often an important motivation: get yourself the lowest interest rate to save money on your repayments. However, it is a dangerous myth to follow as the lowest interest rate available can mean that other crucial characteristics of the loan product are being negatively impacted.
“For me, interest is never the most important aspect of a loan,” emphasizes Ziegler. “You have to make sure that the loan product itself meets your needs and requirements.”
For example, the loan product may have the lowest interest rate on the market, but it could be a fixed rate rather than a variable loan that may not be suitable for you as a borrower.
“You can be tied to a contract for one to five years and pull your hair out because the house loan doesn’t really meet your needs,” adds Ziegler. “It may not have a compensation account, you may be paying too many fees, or you may be locked up and unable to refinance.”
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The loan approval guarantees a good credit rating
A credit score is one of many things a lender considers when approving a loan and can never guarantee that an application will be approved.
“It’s probably one of the most important of them, but a credit score at Bank A is different from a credit score at Bank B. It can often be a minefield,” Hyman said.
Ziegler said lenders looked for the “four Cs of the loan” when considering a home loan. The first is the character a lender would like to see with a strong credit history.
Second is the ability to repay a loan, he said. “They will look at your income and expenses to see if you can pay back the loan you are applying for.
“Third is capital. Here the bank evaluates your equity or your deposit to show that you are handling your money well and that you have a strong financial position behind you. ”
The fourth is collateral, where the lender assesses the type of collateral attached to the loan. This includes checking the property and the zip code itself to make sure it is a safe investment.
The 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 that determines how much interest banks pay on the money they borrow.
Changes in the cash rate affect the interest rates set by the banks. However, if you notice a change in the cash rate, it doesn’t mean your home loan provider is guaranteed to follow suit and adjust your home loan rate.
“The banks or lenders are not required to adhere to RBA changes,” said Ziegler. “So if the RBA cuts their cash rate, which it has been doing in the last three to six months, banks are not required to follow suit with regards to the decrease.”
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