Unless you’re very lucky, you’ll require a mortgage to be able to buy your first home.
But the amount of mortgage misconceptions, contradictory rules and mind-boggling jargon out there makes it hard to understand how mortgages work, let alone acquire one.
Below, we bust probably the most misguided beliefs that do the rounds and attempt to demystify the strange world of mortgages.
Myth 1. You don't have to consider mortgages until you've found the ideal property
Sure, you won't need to actually obtain a mortgage until you've had an offer on a property accepted. However, you certainly need to have scoped out mortgages before then, to check on what you can afford.
Different lenders will offer you different amounts, but a great way of getting a precise idea of your financial allowance is to use for a mortgage 'agreement in principle' (AIP). This can be a statement from the lender they would, in principle, lend you a specific amount of money.
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Myth 2. You always require a deposit to buy a property
It’s true that you’d normally need a deposit of at least 5% to purchase a house. Just a few lenders recently launched 100% mortgages, where you are taking out financing for the whole price of the home.
There aren't many 100% mortgages available, though, plus they all currently require a parent or close family member to place money aside to guarantee the loan or let the lender secure electric power charge over their very own home. Additionally they carry a serious risk of negative equity, that is whenever your property’s value falls and also you owe more on your mortgage than your home is worth.
Myth 3. Your parents need spare cash when they want to help
Giving you a deposit or helping with a 100% mortgage aren’t the only ways your parents will help you buy a home.
If they’re homeowners, your parents could act as guarantors in your mortgage, meaning they would need to cover any shortfall in case your property was repossessed and sold by the lender.
Your parents would have to secure a charge against their own home to do that, however it might boost your likelihood of being accepted with a mortgage lender.
Myth 4. You'll be able to obtain a mortgage if your rent costs more than the usual mortgage would
Mortgage repayments might be less expensive than your monthly rent – but that doesn’t suggest you’ll get accepted with a lender.
Before deciding whether to give you a mortgage, a lender will assess your earnings and outgoings to make sure you can afford the monthly repayments both now and when rates would rise.
An independent large financial company will be able to recommend the lender most likely to accept your application.
Myth 5. Can’t borrow enough? You’ll require a bigger deposit
Saving a big enough deposit can seem to be as an obstacle to buying your first home. But there are government schemes to help first-time buyers onto the property ladder.
With a Help to purchase equity loan you can borrow between 15% and 40% in the government towards the price of a new-build home, based on where you reside.
Alternatively, with shared ownership you can buy a share of the property and pay rent around the rest. Which means you can include a smaller deposit than should you be buying a whole property.
Myth 6. You cannot obtain a mortgage if you have a minimal credit score
Getting a home loan can be challenging if you have a bad credit history, but it is not possible. Some mortgage lenders offer poor credit mortgages specifically designed for people in cases like this.
However, there's a distinction between a bad credit history (due to missed loan payments or a CCJ, for example) and no credit rating at all, which might be the case if you’ve never taken out credit or perhaps a loan.
If you fall into the second camp, take some time to develop your credit score rather than opting for a bad credit mortgage, because these generally include much higher rates.
Myth 7. You are able to only obtain a mortgage from your current bank
Your bank might bombard you with adverts for its mortgage range as well as offer preferential rates to you as an existing customer.
However, with more than 80 mortgage brokers on the market, it's worth shopping around before deciding who to apply with.
There are thousands of mortgages available, meaning that choosing the best deal could be overwhelming. A whole-of-market mortgage broker can help you find the correct mortgage based on your individual situation.
Myth 8. Lowest rate of interest = cheapest mortgage
The interest rate you'll pay is among several factors influencing the total cost of a mortgage. You’ll also need to take a look at:
Find out more: mortgage interest rates explained
