For most of us, buying our first home is the biggest financial decision we’ll ever make. So is it any wonder that first homebuyers have reservations about the process, especially given there is so much advice floating around, including advice from well-meaning friends and relatives, who may not necessarily have their facts in order? Let’s bust the current top 5 myths relating to buying your first home and applying for the finance to buy it.
Myth 1 – I must be completely debt-free before I can apply for a home loan
Sure that would be the ideal situation. But being debt free is not a prerequisite for applying for a home loan. You could still be paying off a car or last year’s trip overseas. As long as you can demonstrate your ability to manage all your debts, including the mortgage, your application will not be dismissed by the lender.
Myth 2 – My parents will be out of pocket if they go guarantor on my loan
If your parents offer to go guarantor on your home loan to help you get into your first home sooner don’t worry that they will be out of pocket. They won’t be, unless you default on the loan down the track. No money actually exchanges hands when your parents go guarantor. They don’t pay the bank anything and they also don’t have to give you any money. Instead, they put their property (the home they live in or an investment property) up as security for your loan. If you default on your loan however, your guarantor is responsible for paying back the debt. So a lot of trust and responsibility is involved in a guarantor situation.
Myth 3 – A bad credit history means no lender will consider me
Worried that you have missed the occasional bill or rent payment in the past? While a bad credit history can make it harder to secure a home loan, it doesn’t make the process impossible, nor does it mean your credit history is tarnished forever. Just be completely transparent with your lender or mortgage broker about your current and past financial situation.
Myth 4 – You need a 20% deposit
While it’s always a good idea to put forward a decent sized deposit, you no longer need 20% to apply for a mortgage. These days you can secure a home loan with as little as 5% deposit as long as you can prove that you have the capacity to meet repayments of the larger loan you will need. Most lenders will require you to take out Lender’s Mortgage Insurance (LMI) if you have a deposit of less than 20% of the purchase price.
Myth 5 – It’s cheaper to rent
Some people believe they will never be able to buy a home because they can’t afford mortgage repayments. They also believe it will be cheaper to rent for the rest of their lives. While it comes down to personal preference, it is not necessarily cheaper to rent when you consider the cost of rent in some areas compared to the median house price. Importantly also, buying property is a long-term investment. Any increase in the value of your property is to your advantage, not your landlord’s. Furthermore, the more money you pay off your mortgage, the closer you are to owning it, especially with interest rates as low as they are. The same can’t be said when you are a tenant because your rent helps the landlord own the property.
With interest rates the lowest they have ever been and the median house price still at an affordable level in WA, now is an excellent time to get onto the property ladder.