Taking out a home loan is one of the biggest financial commitments most of us will ever make. So it’s important to do your research first so you know what you’re getting into.
But while there’s plenty of useful information out there, there are a lot of common misconceptions too. To help set the record straight, we’ve busted five of the biggest home loan myths below.
Myth #1: Borrowing through a big bank is always better
Truth: Some people believe getting a loan from a big four bank is somehow safer than going to a smaller lender. That isn’t the case.
First, it’s the lender that takes the risk, not the borrower (as the lender is the one giving money to the borrower, not the other way around). Second, lenders large and small are regulated and forced to follow rules around lending to consumers.
Another potential negative of using the big banks is that they might enforce stricter lending criteria and charge higher interest rates. By comparison, smaller lenders may be more likely to find solutions for borrowers who fall slightly outside standard lending scenarios.
Myth #2: Your current bank will reward your loyalty with a good rate
Truth: A lot of people assume the bank where they have their savings account will recognise their loyalty by offering them the best deal available.
While some banks do reward loyalty, it still pays for a borrower to shop around as the mortgage industry is very competitive. Small lenders generally have lower overheads and operating costs than banks with branches, which often means they are able to charge lower interest rates.
Myth #3: You can’t borrow if you have debt
Truth: Most Australians have debt, whether it’s a student loan, car finance, an existing mortgage or credit cards. So what matters isn’t the debt itself (or no one would ever be able to borrow money!). Rather, lenders take into account your existing debt to work out whether you can afford a new loan.
They do that by looking at how much debt you’re carrying relative to your total income. If you do have debt, always make your repayments on time. This shows lenders you are responsible with money, and can positively impact your chances of being approved.
Myth #4: Using a credit card is good for your credit score and will increase your chances of approval
Truth: With comprehensive credit reporting in place, some believe that if you use your credit card more then you credit score will look better for a lender. Credit cards can impact your chances of approval, but not in a good way.
Many lenders assume a credit card is being used up to its limit – even when it isn’t. This can decrease your borrowing power, and in some cases derail your application altogether.
So before applying for a home loan, review any cards you don’t use. And if you do use them, maybe look at reducing their limits as much as you possibly can, or chat to your lender about it!
Myth #5: Interest rates are set by the Reserve Bank of Australia (RBA)
Truth: The RBA doesn’t set interest rates on home loans.
What it does set is the official ‘cash rate’. The cash rate is the interest rate that financial institutions charge each other when they borrow money from each other. And while this does influence home loan rates, it’s up to the individual lenders how much they charge. This means rates will vary, so it’s always worth shopping around for the most competitive loan.