Top myths about home loans which need to die

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The top home loans myths that need to die

So you think you know everything there is to know about home loans? Think again.

If you’ve never applied for a home loan before, many aspects of the lending process will be a mystery to you. Even if you think you have a good idea about what’s involved in taking out a home loan, there are plenty of misconceptions about the mortgage process that are pretty far removed from reality.

From finding the best interest rate to choosing a lender, there are several myths and misunderstandings about mortgages that can confuse and even disadvantage some first-time borrowers. Let’s look at some of the most common misconceptions about getting a mortgage and why they are simply untrue.

1. You must have a 20% deposit

There are plenty of misconceptions surrounding the size of deposit you need to have saved in order to qualify for a home loan. The truth is that the loan to valuation ratio (LVR) you can access varies depending on the lender and your financial circumstances. A 20% deposit is a good figure to aim for as borrowing more than 80% LVR will usually require you to take out lender’s mortgage insurance (LMI), but some lenders offer loans of up to 95% LVR (meaning a 5% deposit) to borrowers who meet specific criteria.

In fact, some lenders even offer home loans with LVRs of as high as 100% for people in stable jobs with very high income-earning capacities, such as doctors.

2. The loan with the lowest interest rate is the cheapest

We’ll say it again. The interest rate is an important factor in determining the affordability of a home loan. But you also need to consider the fees that apply to a loan, including the monthly service fee, annual fee, application and establishment fee, legal fee and fees for using loan features such as a redraw facility. You can get a much clearer picture of which loan is the most affordable by checking out the comparison rate.

3. The “Big Four Banks” offer the best home loans

Australia’s largest banks (CommBank, Westpac, ANZ and NAB) may dominate the mortgage market, but that doesn’t mean they offer the best home loans. Compare the interest rates, fees and features of a wide range of mortgages at finder.com.au and you’ll soon see that there are plenty of other Australian lenders offering competitive home loan deals.

4. It doesn’t matter whether you make fortnightly or monthly repayments

If you make fortnightly rather than monthly repayments, you could save thousands of dollars over the life of the loan. The simple fact that there are 26 fortnights in a year means that you will effectively make an extra monthly repayment each year, which in turn means you will pay your debt down quicker and incur less interest. Find out how you can save money by switching from monthly to fortnightly repayments.

5. Your current bank is the best choice for a home loan

The fact that you have a transaction account with a bank does not automatically make them your best option for a home loan, nor does the fact that you have been a loyal customer of the bank for decades. The Australian home loan market is competitive and there could be hundreds of loans out there that are suitable for you.

But if you limit yourself to the loans offered by just one lender, you could miss out on lower interest rates, lower fees and better loan features elsewhere. Shop around for a mortgage that meets all your requirements and you could save tens of thousands of dollars over the life of your loan.

Compare current home loans today armed with this information

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Loan purpose
Offset account
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Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment
loans.com.au Essentials - Variable (Owner Occupier, P&I)
A basic home loan with a competitive rate and low fees.
3.64% 3.66% $0 $0 p.a. 80% Go to site More info
Tic:Toc Live in Loan Variable Rate
A competitive variable rate product with low fees offered by a 100% online lender.
3.68% 3.69% $0 $0 p.a. 80% Go to site More info
Greater Bank Ultimate Home Loan - Discounted 1 Year Fixed LVR ≤85% ($150K+ Owner Occupier)
Discount off an already competitive interest rate for loans over $150k. NSW, QLD and ACT residents only.
3.49% 4.47% $0 $375 p.a. 85% Go to site More info
UBank UHomeLoan Variable Rate - Standard Variable Rate Value Offer (Owner Occupier P&I)
Combine a low variable interest rate and free redraw with no application or ongoing fees.
3.74% 3.74% $0 $0 p.a. 80% Go to site More info
Reduce Home Loans Rate Buster 100% Offset Variable Home Loan - Up to $750k (LVR <=80%)
Borrow up to 80% LVR with no ongoing fees and a 100% offset account.
3.54% 3.54% $440 $0 p.a. 80% Enquire now More info
loans.com.au Offset Variable - Up to 80% LVR (Owner Occupier P&I)
Take advantage of a 100% offset account along with no annual or application fees.
3.72% 3.74% $0 $0 p.a. 80% Go to site More info
IMB Budget Home Loan - Special LVR <=80% (Owner Occupier and Principal & Interest only)
A special limited time offer for owner occupiers. An IMB Transaction Account must be opened with this loan.
3.79% 3.84% $445 $0 p.a. 80% Go to site More info
Bank Australia Basic Home Loan - Variable (Owner Occupier)
A competitive variable rate that allows borrowers to borrow a minimum of $100,000 with a $0 ongoing fee.
3.86% 3.87% $0 $0 p.a. 80% Go to site More info
HSBC Home Value Loan - Resident Owner Occupier only
Enjoy a low variable rate with no ongoing fees and borrow up to 90% of the value of the property.
3.85% 3.86% $0 $0 p.a. 90% Go to site More info
NAB Choice Package Home Loan - 2 Year Fixed (Owner Occupier P&I) First Home Buyer Special
A special rate for first home buyers buying residential property and borrowing over $150K. 350K NAB Rewards Points offer available. Terms and conditions apply.
3.69% 4.86% $0 $395 p.a. 90% Go to site More info
St.George Basic Home Loan - Promotional Rate (Owner Occupier, P&I)
A no frills loan with a competitive rate and a maximum LVR of 95%.
3.80% 3.81% $0 $0 p.a. 95% Enquire now More info
IMB Budget Home Loan - LVR <=90% (Owner Occupier)
Get a competitive rate without features you may not use.
3.97% 4.02% $445 $0 p.a. 90% Go to site More info
ING Orange Advantage Loan - $500,000+ (LVR <=80% Owner Occupier, P&I)
A loan with no application fee and borrow up to 95% LVR.
3.74% 4.06% $0 $299 p.a. 95% Go to site More info
Newcastle Permanent Building Society Fixed Rate Home Loan - 2 Year Fixed (Owner Occupier Special Rate, P&I)
Owner-occupiers can lock in a competitive rate with no ongoing fees. Conditions apply.
3.74% 4.85% $0 $0 p.a. 95% Go to site More info
ING Orange Advantage Loan - $150,000 to $500,000 (LVR <=80% Owner Occupier, P&I)
A fully featured home loan with an offset account and discounts available. $1000 cashback offer available for loans over $300k. Terms and conditions apply.
3.79% 4.11% $0 $299 p.a. 80% Go to site More info
Mortgage House Advantage Variable Home Loan - 80 (PAYG Special No Offset)
A home loan with a competitive variable rate, limited fees and plenty of flexibility.
3.64% 3.66% $0 $0 p.a. 80% Go to site More info
Greater Bank Great Rate Discount Variable with Family Pledge Home Loan - Up to 110% LVR
Discounted rate available with family pledge loans. Family pledge loans require no LMI and no deposit. NSW, Qld and ACT only.
3.99% 3.99% $0 $0 p.a. 110% Go to site More info
Bank Australia Basic Home Loan - Special LVR <70% (Owner Occupier)
A special variable rate home loan with no application or ongoing fees.
3.74% 3.75% $0 $0 p.a. 70% Go to site More info
3.79% 4.07% $500 $0 p.a. 95% Go to site More info
Heritage Bank Discount Variable Home Loan - Special Rate Offer (Owner Occupier) New Customers Only
A low rate variable home loan offer with no monthly fees or application fee charge.
3.99% 4.04% $600 $0 p.a. 90% Go to site More info
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Fill in the form and you’ll be called by a specialist mortgage broker from eChoice to have a discussion about your options.

Your eChoice broker will compare hundreds of home loans from more than 30 lenders to help you find the right loan for you. They’ll also help you calculate your borrowing power, and present your options in a free home loan report.

eChoice is an award-winning broker with over 18 years of experience, and has helped more than 50,000 Australians to find the right home loan.

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6. You can’t get a home loan if you’re single

This is completely untrue. As long as you can afford to make the necessary loan repayments and pay down your debt, you can qualify for a home loan. Sure, you may have greater borrowing power if you’re a couple and have two incomes to service the loan, but just because you’re single doesn’t mean you can’t take out a mortgage.Home loan myths - you have to be single to get a home loan

7. It’s the lender’s responsibility to ensure that you can repay the loan

In reality, both parties have a responsibility to ensure that you can afford to service the loan. Your bank will have a range of lending criteria in place to minimise the risk of offering financing to anyone who is likely to default on their mortgage, but it’s also up to you to make sure you’re not over-extending yourself.

Home loan myths - it's your responsibility

8. A bad credit history doesn’t matter if the debt has been paid off

Unfortunately, this is not the case. Any defaults are recorded in your credit file and will be viewed in a negative light by lenders. In fact, even one blemish on your credit file could lead to your home loan application being rejected.

9. The Reserve Bank of Australia determines your home loan interest rate

The Reserve Bank of Australia sets Australia’s official cash rate, but it’s up to a lender to decide whether they want to pass rate cuts or rises on to their customers. Lenders also get to decide when they pass rate changes on to their customers, so don’t assume that a drop on the official cash rate will automatically lead to a decrease in your home loan interest payments.

10. The interest rate alone determines your monthly repayments

While the interest rate is undoubtedly a hugely important factor in working out your monthly repayments and the overall cost of your home loan, it’s certainly not the only element that determines how much you pay each month. Your repayments are also influenced by the principal (the amount you borrow), any ongoing fees, lender’s mortgage insurance (LMI) premiums and potentially a few other factors.

11. A deposit is all you need to buy a home

Not true. There are several other costs you’ll need to factor into your calculations when budgeting for the purchase of a home. These include stamp duty, building and pest inspections, LMI, home insurance, conveyancing costs and home loan fees. Our cost of buying a property calculator can help you work out the expenses involved and how much money you need to save.

12. A fixed rate is better than a variable rate (or vice versa)

Both fixed and variable interest rates have their own pros and cons - neither one is inherently better than the other. The benefits of a fixed rate are that it allows you to budget for consistent repayment amounts and offers protection against any interest rate rises. Of course, this means you will also miss out on any interest rate drops that may occur.

Variable interest rates offer more flexibility, allowing you to take advantage of interest savings whenever rates drop. However, if interest rates rise then your regular repayment amounts will increase.

13. You have to pay a fee to use a mortgage broker

Some people put off enlisting a mortgage broker to help them find the right home loan out of fear that the broker will cost too much. In reality, most mortgage brokers offer their services free of charge. Instead of charging you, brokers make money on the upfront commission they receive from a lender for generating new business, and the trailing commission they receive every year you still owe money on your loan.

14. Online loans are simpler and faster

Recent years have seen a rise in the popularity of online lenders and loans. These loans offer undeniable benefits, including competitive interest rates and a fast and convenient application process.

However, that doesn’t necessarily mean that you will find it easier to apply for an online home loan than you would with a traditional lender. In fact, depending on your circumstances the traditional lending approach may be simpler and help you find a more suitable mortgage. Traditional lenders today can make the application process easier with lenders who visit you.


Now that the record has been set straight, hopefully these few home truths will help you find a mortgage that matches all your borrowing needs.

Images: Shutterstock

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Bank Australia Basic Home Loan - Variable (Owner Occupier)

A competitive variable rate that allows borrowers to borrow a minimum of $100,000 with a $0 ongoing fee.

NAB Choice Package Home Loan - 2 Year Fixed (Owner Occupier P&I)

A fixed rate package with flexible repayment options. 350K NAB Rewards Points offer available. Terms and conditions apply.

Greater Bank Ultimate Home Loan - Discounted 1 Year Fixed LVR ≤85% ($150K+ Owner Occupier)

Discount off an already competitive interest rate for loans over $150k. NSW, QLD and ACT residents only.

IMB Budget Home Loan - LVR <=90% (Owner Occupier)

Get a competitive rate without features you may not use.

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2 Responses

  1. Default Gravatar
    PaulAugust 25, 2016

    Can you be declined because of your age?

    • Staff
      AnndyAugust 29, 2016Staff

      Hi Paul,

      Thanks for your question.

      When it comes to applying for a home loan, there is no generally accepted maximum age limit. We also have Australia’s anti-discrimination legislations, namely the Age Discrimination Act 2004 and National Consumer Credit Protection Act 2009, that prevent lenders from discriminating home loan applicants due to age.

      However, please note that lenders also have their set of eligibility criteria to ensure that borrowers can afford to repay the loan without any undue financial hardships. Because of this, the older you are, the more difficult it might be to obtain home loan approval.

      I hope this helps.

      Cheers,
      Anndy

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