1 AUSTRALIA S TOP 30 HOME LOAN MYTHS BUSTED Australia s Top 30 Home Loan Myths BUSTED!
2 Fairer home loans for Australians Hi, I m Mark Bouris from Yellow Brick Road. Australia, it s time for a fairer deal so we ve busted Australia s Top 30 home loan myths. Inside we ve revealed what some lenders bury deep in the fine print and don t want you to know about. Isn t it time you deserve a fairer deal on your home loan? Read on for the truth, then chat to one of our Wealth Managers. They ll help show you the way ahead to smash your home loan. To get in touch, visit ybr.com.au/myths and register with your details. Cheers Mark Australia s Top 30 Home Loan Myths BUSTED! 2
3 #01 Refinancing is too expensive, and with exit costs it s not really worth it. Exit fees on variable rate loans were banned in 2011, so most Australians can refinance without getting hit with a hefty penalty. However break costs on fixed rate home loans are still applicable. Most mortgage brokers can analyse the life of loan savings versus the break costs for you. #02 You can judge how competitive a home loan is from its interest rate. Not all costs of a home loan are captured in the interest rate. There are often ongoing fees and set-up and exit costs that need to be taken into account. When comparing loans to refinance, always take a look at the comparison rate which takes all fees, costs and introductory or short-term special rates into account. #03 It s not worth refinancing for a rate only 0.5% lower than your current rate. Depending on your loan size, refinancing can be very worthwhile. For example, if you have a $400,000, 30 year loan and your rate is 5.5%, switching to a 5.0% rate could save you nearly $125 per month or nearly $45,000 over the life of the loan! #04 You ll save money by consolidating personal loan debt into your home loan. It s true that the home loan interest rate may be lower, but if a personal loan with a five-year term is consolidated into a 30-year home loan, you may end up paying more interest in the long run. The key to loan consolidation is to maintain the same repayment levels to ensure you re paying less interest but not extending the life of your personal loan. #05 There s no difference in paying monthly or fortnightly loan repayments. There are often more than four weeks in a month, which means that fortnightly payments could allow you to pay off your loan faster. Using a 30-year, $400,000 loan on a 5% interest rate, monthly payments would equal $2, If half of this payment were made fortnightly, you d be looking at a loan term reduction of almost five years and over $68,000 in total interest saved. #06 If the bank you ve been with for years won t give you a loan, then no other bank will. Banks have different policies and different lenders focus on different criteria. Often a mortgage broker can help you find a loan that suits your individual needs. Australia s Top 30 Home Loan Myths BUSTED! 3
4 #07 It s better to have cash for emergencies than use it to make extra loan payments. Just about all variable rate home loans have redraw access which allows access to those additional funds. Many variable loan accounts also offer an offset account which helps reduce home loan interest where the balance in the offset account is subtracted from the loan balance for the purposes of calculating home loan interest. #08 You can t use the equity in your home to help fund an investment. Most home loans allow you to set up separate accounts under the one mortgage. This allows you to keep your investment and home loan debt separate. However, you should always seek independent financial and tax advice. #09 You re too old to get a 30 year loan to refinance your mortgage. It s illegal to discriminate against someone based on their age. Shorter loan terms or other exit strategies need to be considered, but you can t be turned away just because of your age. #10 Refinancing to a Line of Credit is more expensive and dangerous. Some lenders don t charge a premium for a Line of Credit facility. It s true that a Line of Credit is not suited to all borrowers, especially ones who are having difficulty budgeting or lacking financial experience. It s worth speaking to an expert who will match you with a loan to suit your needs. #11 The Reserve Bank controls home loan rates. The RBA adjusts the cash rate from time to time based on a number of domestic and global economic factors. While these changes influence mortgage rates, lenders also consider other factors ie deposit rates and other funding costs. Essentially, each individual lender has the ability to change their rates how and when they see fit. #12 Once I find a good rate, I m sorted for the life of my loan. Lenders can move their variable rates at any time and how they compare to other lenders can vary. Therefore a loan that s competitive today might not be as competitive in a couple of years time. It s ideal to review your loan every year or two to ensure that your rate is still competitive. #13 All home loans are the same. While all loans share common features, the details of how they work can differ greatly. The right type of loan can save a borrower a huge amount of money, which is why matching the borrower with the right type of loan is so important. Australia s Top 30 Home Loan Myths BUSTED! 4
5 #14 The best home loan rates are from online lenders. Online lenders can have very competitive rates, but don t assume this will always be the case! Borrowers need to ensure they get the personalised service they require, which means that an online lender might not be the best option. There are plenty of lenders that offer both competitive rates with features and service to match; you just have to shop around. #15 You ll be better off with a bank s special introductory interest rate. Lenders often use discounted, introductory or honeymoon offers to get customers in the door. Once the special rate is over, the revert rate is often much higher. So you don t get caught out, take a look at the comparison rate. It ll give you a better idea of what you ll be paying over the long term, not just the introductory period. #16 It s not wise to borrow outside the safety of the big four banks. Many smaller lenders have more competitive rates and flexible terms than the major banks. With the Federal Government banning exit fees, it provides consumers with greater power and choice to refinance to a better deal. During the Global Financial Crisis, the Government guarantee of bank deposits prompted this myth, however, the guarantee only extends to deposits not loans. #17 I have a fixed loan so I can t refinance. Anyone can refinance their fixed rate loan, although they may incur break costs. However, these costs should always be compared with the potential savings of moving your loan, or simply switching to a variable rate with your current lender. It s important to note that lenders are obliged to provide you with indicative break costs should you request them. Talk to an expert and do the comparisons. #18 You can save on your loan by trying to time the market with fixed rate loans. If we could all predict the way interest rates would move, economists would be out of a job! Variable rate loans generally perform better over time. However, fixed rate loans provide certainty for both the borrower and the banks and they could be a good option for people looking for security. It s best to look at all your options, including a part fixed and part variable loan and decide what s best for you. #19 It costs more to deal with a mortgage broker than a bank. Getting a loan through a broker generally costs the same as dealing directly with a bank because any commission that a broker receives comes directly from the bank, not the borrower. Australia s Top 30 Home Loan Myths BUSTED! 5
6 #20 I need a 20% deposit to buy a property. If you ve got less than a 20% deposit, you can still buy a property. In fact, many lenders will allow you to buy a property with as little as a 5% deposit. However, if you re borrowing with less than 20% deposit or equity, Lenders Mortgage Insurance (LMI) may be required. This insurance is arranged by the lender, but the premium is paid by you. The insurance protects the lender in the event that you can t repay your loan. Sometimes the cost of LMI can be included in the loan amount. #21 Lenders Mortgage Insurance covers your repayments if you become sick or die. Lenders Mortgage Insurance covers you for nothing, it is actually insurance for the lender in the event you default on your loan and the property is sold at a loss. In fact it s what you have to pay as an added cost if you borrow more than 80% of the value of the new property. #22 Banks don t like lending to single people. Quite simply, if a person can afford a loan on one income, and if all other usual credit criteria are met, then a loan is just as likely to be approved for a single person as it is for a couple with two incomes. #23 Everyone who has a variable rate loan is paying around the same interest. If you do a quick review of the market, it reveals over a 2% difference in variable rate mortgages. Using a 30-year, $400,000 loan as an example, the difference between 5% and 7% is over $500 per month! So it s best to do your homework even when refinancing. #24 Self-employed people automatically have to pay a higher interest rate. If you re self-employed and don t have your tax returns available, you may be placed into a low documentation (or low-doc) loan. These can come with higher interest rates. If your financials and tax returns are available for assessment, you can qualify for the same rate as a PAYG employee. #25 You can t refinance because of credit card debt, even though you ve got equity in your property. Lenders will focus on your ability to repay a loan and will take all debts into consideration. They will also look at your repayment history. If you are struggling with cash flow, it might be a good idea to talk to an expert about the options available to you. Australia s Top 30 Home Loan Myths BUSTED! 6
7 #26 On a fixed rate loan you can only afford to pay the minimum and nothing more. An increasing number of lenders now allow repayment flexibility on fixed rate loan accounts. Usually it s a set percentage or dollar amount each year that can be repaid over and above the scheduled repayment without penalty. Of course, make sure you check with your lender to see if this is possible for you. #27 You have to pay a broker to lodge and handle loan applications for purchases or refinances. The majority of brokers don t charge any fees because they are compensated by the lender. This doesn t affect your interest rate or fees and can sometimes allow you to find a more competitive loan. #28 Anyone with credit defaults or bankruptcy history wont qualify for a home loan. There are specialised home loan options available to assist people with adverse credit history. It s best to be upfront with your broker and see what s available for you. #29 The loan that has the lowest interest rate is the best loan for you. The best loan is one that best suits the borrower s specific financial goals and circumstances. You need to consider not just the rate, but the loan features, such as total fees or comparison rate over the loan term, and break costs for fixed rate loans, lenders criteria and if there are any limitations to the loan. #30 Repaying principal and interest on an investment loan is better than paying interest only. Not necessarily. Paying interest only with property investment allows you to free up your cash-flow, but depending on how you use the additional cash will influence the benefit. There are a number of factors to consider (including tax deductability) when making this decision. Get in touch with one of our Wealth Managers to see how we can help you. Visit ybr.com.au/myths or call Australia s Top 30 Home Loan Myths BUSTED! 7