Top four home loan myths debunked

You have decided that now is the right time to enter the property market – but where to start? While some may choose to jump online and see what’s available in their desired area, I encourage prospective homebuyers to tackle the financial matters at hand first.

Before shopping around, it’s essential that you have a clear understanding of what you can realistically afford and whether you’re likely to be approved for a home loan.

Although there’s plenty of information available regarding the free online tools and resources available to prospective homebuyers on their journey to homeownership, many would-be buyers still feel unsure about where to begin, or how to gain access to these tools.

Listen: What new home buyers should know before starting their property search

To start, make use of the free online tools available to check your credit score, assess your affordability and subsequently receive a prequalification. This way, you avoid disappointment down the line and will have a clearer understanding of what you can realistically afford (and will most likely be approved for).

Here I debunk the top four myths commonly associated with home loans as follows:

Myth #1: A perfect credit score is the only way to secure your dream home

While a credit score in the range of 781-850 is considered excellent, the banks will generally accept a credit score of 610-plus. A credit score is a good indicator of your ability to repay your debt on time each month and forms a central part of the home loan approval process.

It is calculated by taking into account any debt repayments history, the amounts owed, the types of credit applied for, how long the various accounts have been open for, how much credit is available and any history relating to cases of bankruptcy or judgements against the potential homebuyer.

In a case where your credit score is lower than 610, you will need to work on improving it prior to applying (or re-applying) for a home loan.

Key tips to improve your credit score:

• Keep servicing your debt.
• Make sure you don’t apply for more than one loan at a time.
• Always pay your accounts in full and on time.
  Avoid spending up to your credit limit.
• Avoid owing more than a third of your gross income on debt.
• Close accounts when you’ve paid the balance owed.
• Avoid revolving credit.

Myth #2: A big deposit is the only way to secure a home loan

Putting down a deposit reduces your monthly home loan instalments, tells the agent and seller that you are serious about purchasing a home and may help you stand out in a case where there is more than one offer on the table. However, for those with smaller – or non-existent deposits – there is still hope.

The banks are increasingly competing for market share in a competitive home loan environment and depending on your lending profile, you may be eligible for a zero-deposit home loan (100% bond) or could negotiate a smaller deposit on a home loan (below 10%).

This is why it’s so important to understand how much the bank is willing to approve you for before shopping around and signing an OTP.

Myth #3: My personal bank will always provide me with the best deal on a home loan

This is simply incorrect. Each bank has different lending criteria. Some banks may offer more favourable interest rates, deposit terms and even repayment terms (i.e., 20 versus 30 years) than others .

By applying directly to your bank, you may run the risk of being declined or settling for the first deal. It’s important to remember that even an interest rate saving of just 0.02% on a home loan can save you thousands in the long run, so it’s important that you work with a company that can help you compare.

Myth #4: Once you own a home, you’re done paying

You’ve finally secured your dream home, and the first home loan payment has just been debited from your account; does this mean that you’re now free to spend the rest of your income however you please? Not quite.

Many people assume that once the monthly home loan repayment comes off their bank account, their financial responsibilities relating to the home are over, but this couldn’t be further from the truth.

Read: Female first-time homebuyers overtake men in SA

Beyond the home loan, homeowners must budget for several ongoing and once-off expenses. Homeowners must consider the overall costs of homeownership – apart from the home loan repayment, there will be fees related to maintenance and insurance of your new asset, as well as the fluctuating expenses of utilities such as water and electricity.

If you’re purchasing a sectional title property (i.e., a unit located in a complex), this will include monthly levies which cover important external maintenance costs such as security, refuse removal and gardening.

Homeowners – whether in freehold or sectional title properties – must also budget for rates, and taxes.

Ask your estate agent for copies of past invoices so that you have a clearer idea of what is owed each month.

Prior to the bank approving a home loan, buildings insurance needs to be in place. Buildings insurance is not only mandatory, but it’s also beneficial to the buyer as it covers the structure of the home as well as permanent fixtures and fittings.

To conclude, navigating the home loan process can feel overwhelming, especially with so many myths clouding the path to homeownership. However, by partnering with the right service provider, you can rest assured that the journey to homeownership will come with greater certainty and less stress.

Gavin Lomberg is the CEO of ooba Home Loans.

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