I’ve noticed a number of myths and misconceptions that keep coming up about mortgages, so I thought I would address the 10 most common.
1. It’s not worth refinancing a mortgage for an improvement of half a per cent. If you have a $350,000, 30-year loan with an interest rate of 5.24 per cent, and you refinanced to a rate of 4.74 per cent, you would save $107 a month and $38,480 over the life of the loan. Is that worth it to you?
2. I can’t refinance a fixed-rate loan. Not true. You can refinance a fixed-rate loan but you’ll be hit with a break cost, which is compensation for the loss the bank will incur when you leave.
Weigh up the break costs versus the potential savings and see what you come up with.
3. I need a 20 per cent deposit. Many lenders will give you a loan with as little as 5 per cent deposit, although with less than 20 per cent you will have to get lender’s mortgage insurance, which some lenders will include in your loan.
4. I want to use a mortgage broker but what about the fees? Mortgage broking fees are paid by the lender, not by you. A mortgage broker finds you the best loan at the most competitive rate.
5. A competitive rate doesn’t really matter because the Reserve Bank controls home loan rates. The RBA adjusts the cash rate from time to time but each lender can change their rates as they see fit.
6. Once I find a good rate, I’m sorted for the life of my loan. Lenders can move their variable rates at any time, so a loan that’s competitive today might not be competitive in the future.
7. It doesn’t matter if you pay your loan monthly or fortnightly. False. A 30-year, $350,000 loan on a 4.74 per cent interest rate, would mean monthly repayments of $1,823.66. If you paid half ($911.83) fortnightly, the loan term would be 25 years and six months, and you’d save over $53,000 in interest. Weekly payments are even better!
8. I’m too old to refinance my mortgage. Age discrimination is illegal. A bank looks at your repayment ability, so they’re looking at your income and the loan term.
9. Self-employed people pay higher interest. If you’re self-employed and can’t produce your tax returns, you may be offered a low documentation loan that can have higher interest rates. If your financials and tax returns are in order, you qualify for the same rate as a PAYG employee.
10. Banks keep secret files on my credit history. Wrong. All lenders use a credit reporting system to check your history. Know what they know by finding out your history at mycreditfile.com.au.
What do you think? Talk to me on Twitter @markbouris
Mark Bouris is executive chairman of wealth management company Yellow Brick Road: ybr.com.au