NEW home buyers, wanna-be owners, seasoned investors, upgraders and downsizers – it doesn’t matter where you fit in the property market, there is always something to learn about mortgages.

We’ve asked the experts to debunk five common mortgage myths.

Myth 1: Lowest interest rate loans are best

Unfortunately many borrowers will judge one home loan against another simply on the interest rate, which can be a big mistake.

If they make their decision on this “headline” rate, it could cost them tens of thousands of dollars extra, Resi Mortgage chief executive Lisa Montgomery says.

“Most borrowers don’t look at the comparison rate but they must,” Montgomery says.

“Check the comparison rate. It’s a great rule of thumb that helps you understand at a glance the true cost of a loan.

“It includes all the upfront and ongoing fees that need to be paid during the course of the loan.”
Fees and charges can add several basis points to the cost of the loan. Read the mortgage contract for all the details.

Myth 2: Bad credit ratings prevent borrowing

Your credit rating can both help or hinder the type of mortgage you are offered. If you have a poor record, it does not automatically mean you won’t get a loan.

But it can mean a lender will consider you a greater risk and want to charge a higher interest rate.

Not all unpaid bills and default histories will stop you getting the best deal.

Mortgage broker 1300HomeLoan managing director John Kolenda says defaults on utility bills or phone bills can be explained and overlooked.

“But it is very important to make sure you tell your lender about your history,” Kolenda says.

“Don’t let them find out when they do your credit worthiness search.”

Myth 3: Offset accounts are the best way to cut your interest

Financial research company Canstar analyst Mitchell Watson says there are much better ways to cut your interest costs than using an offset account.

“A lot of people will have their wages or salary paid into a mortgage offset account each month but for the average wage earner this isn’t going to be worth much at all,” he says.

“An offset account for someone on about $65,000 is only going to save about $20 a month interest. Over the life of the loan, however, it does add up to about $14,000.

“However, if you make fortnightly payments instead, so you divided the monthly amount by two and pay it every fortnight, you will save about $55,000 over the life of the loan and cut your loan term by four years.

“Better still, do both – use an offset (account) and fortnightly payments.”

Myth 4: If you pay off your credit card, you’ll be able to borrow more

Wrong. Even if you owe nothing on your credit card, the limit will still be counted towards your total potential outstanding debt, according to 1300HomeLoan.

“Your credit card limit affects your maximum borrowing capacity with some lenders. For that reason, you should reduce your limit or cancel the cards you are not using before applying for a home loan,” Kolenda says.

Myth 5: Pre-approved loans are pretty much guaranteed money

This is not true, the experts say.

Pre-approval is an offer to lend money based on a percentage of the property’s value.

The price you pay is not necessarily its value, Montgomery says.

“Always sign a contract of sale ‘subject to finance’ even if you have a pre-approval,” Kolenda adds.

“Your valuation needs to stack up and you will still need final approval.”

Posted by Karina Barrymore – News Limited on 9th September, 2012