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,” said David Hyman, Domain Home Loans executive director and Lendi managing director, “but the truth is slightly more complicated.”
Brokers are paid by the home loan provider, like a bank, not the home owner. 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.
“The industry as a whole will have protection from next year but Lendi and Domain Home Loans have had the protection for a number of years already,” Hyman said.
“While we do get paid by the lenders, there’s nothing in our incentive structures or platforms that differentiates them.”
There are two different ways in which a mortgage broker can receive their income – commission-based and salary-based, Home Loan Specialist at Domain Home Loans Jake Ziegler said.
“There are a lot of brokers out there, for example commission-based brokers, who may receive certain incentives to send a customer through to a particular lender,” Ziegler said.
“However, at Domain Home Loans, we are salary-based brokers. We don’t receive incentives for particular lenders of products and it means that we are completely unbiased in our recommendations.”
You can’t refinance a fixed-rate loan
Ziegler and Hyman agree that it is a common misconception that a home owner 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 home owners off the process.
“They can range from $500 all the way up to the most I’ve ever seen, which is around $20,000 to $25,000,” Ziegler said.
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.
“Depending on how high your interest rate is, sometimes it’s worth paying that break fee,” Hyman said.
“We recommended speaking with a Home Loan Specialist because it is quite nuanced. You can calculate the savings you’ll pay on your new interest rate versus having to pay 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’ve self-employed, but only if you don’t know what you’re doing, Hyman said.
“We really recommend if you’re self-employed that you deal with a Home Loan Specialist because it is quite complicated depending on how you’ve got your business structured,” he said.
Ziegler said banks did 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,” he said. “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.”
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.
“Rate for me is never really the most important aspect to a loan,” Ziegler stresses. “You need to make sure that the loan product itself actually meets your needs and requirements.”
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.
“You might be locked into a fixed contract for one to five years pulling your hair out because the home loan doesn’t really meet your needs,” Ziegler adds. “It may not have an offset account, you’re paying too many fees or you’re locked in and can’t refinance.”
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,” Hyman said.
Ziegler said lenders looked at the “four Cs of credit” when considering a home loan application. The first is character, which is where a lender wants to see a strong credit history.
“Second is capacity to pay back a loan,” he said. “They’ll look at your income and expenses to see if you can repay the loan you apply for.
“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.
“The banks or lenders are not obliged to adhere to any RBA changes,” Ziegler said. “So if the RBA reduces their cash rate, which they have done over the past three to six months, the banks aren’t obliged to follow suit in terms of a reduction.”