Debunking Home-Buying Myths: Essential Tips for First Home Buyers
First Home Buyer Misconceptions: Essential Tips for First Home Buyers
Buying your first home is an exciting but often daunting journey. As a first home buyer, you might find yourself on the receiving end of a wealth of advice from friends, family, colleagues, and those around you. While well-intentioned, this advice might not always be the expert guidance you need.
With a wealth of information to sift through, misconceptions or myths can muddy the waters, leading to confusion and potentially costly mistakes. It’s crucial to remember that every home-buying journey is unique, and one size does not fit all when it comes to mortgages.
In this blog, we’re debunking some of the most common home-buying myths and misconceptions that often lead first home buyers astray. We aim to provide you with the clarity and confidence that you need to navigate your exciting home-buying journey.
Myth #1: “You should fix the entire loan!”
Contrary to popular belief, fixing your entire home loan in one fixed term might not always be your safest bet, especially if the home loan is a substantial amount.
By splitting your loan into more than one fixed portion, you will hedge your bets against what might happen with interest rate movements in the future, meaning you don’t have 100% of your loan in one fixed term that comes up for renewal and is subjected to whatever the interest rates are at that point in time.
This means if you have a fixed rate expiring at a time when rates have increased substantially since you took out your home loan, it will make it easier to manage the increased repayments when it is only a portion of your loan up for renewal, with the rest still fixed at lower rates. This can work the opposite way if rates were to drop when the first fixed rate comes up for renewal, however, it’s easy to budget for a decrease in your mortgage repayments than an increase.
Depending on your financial circumstances, it may be worth considering a more flexible approach by splitting your mortgage into fixed and variable portions. This strategy allows you to enjoy the stability of fixed rates and more easily absorb interest rate fluctuations throughout the life of your home loan. You should always discuss the best strategies with one of our advisers before implementing your loan structure.
Myth #2: “The shortest total home loan term is your best bet.”
While everyone would love to repay their home loan off faster than the maximum 30-year term banks offer, you do need to think about the future, and what would happen if you were to have a reduction in household income and could no longer afford to meet the more aggressive repayments.
It can often be a good idea to take the loan over the maximum total loan term available to you, however, request the repayments be increased above the minimum from the outset. This way, if you ever need to reduce your repayments back down to the minimum repayments, you can at any stage.
If your total loan term is set at a more aggressive term from the outset, you no longer have the flexibility to do this, and it would require the bank to complete a restructure of your entire home loan. With some banks, this does mean you have to break any existing fixed loans and therefore, open yourself up to a financial hit for short-term cash flow relief.
Remember to discuss different loan structures with one of our advisers to ensure you find the best fit for you.
Myth #3: “Don’t pay off your student loan because it’s 0% interest.”
A common theme we see from first home buyers is that they believe you shouldn’t pay off your student loan because it is at 0% interest. Whilst this can be the case for many people, if your student loan balance is reasonably low, and your income high, it can sometimes be the difference between being able to buy a home at the price bracket you want or not.
This is due to the fact the student loan repayments required are based on a percentage of your income and not actually how much you owe or have a set repayment term. If you have enough savings to clear the small balance on the student loan and still meet the deposit requirements to purchase, then this may be a good option.
It is very important to review your overall financial position with one of our advisers before proceeding with this option.
Myth #4: “The deposit is the only upfront cost you need to budget for.”
The deposit is a significant cost of buying your first home, but it’s far from the only cost. First home buyers can often overlook additional costs such as legal fees, pre-purchase property reports, moving expenses, and recurring costs like property rates, home insurance, personal risk insurance, and maintenance expenses. Ensure to account for all these costs in your budget to avoid any unexpected surprises.
Myth #5: “What the bank will lend you, is what you can afford.”
While it might be tempting to borrow the maximum loan amount the bank offers, it’s not always the wisest decision. What the bank is prepared to lend you versus what you are comfortable meeting in home loan repayments are not always aligned.
Your affordability isn’t just about whether you can meet the home loan repayments. You need to consider all current and future expenses, factoring in your ability to make the repayments comfortably without straining your budget or lifestyle. What the bank is willing to lend may stretch your budget too thin and leave you vulnerable to unexpected costs. Remember, just because you can borrow a specific amount doesn’t mean you should.
Myth #6: “Paying weekly will save you thousands more than paying monthly.”
This common misconception leads many to believe that weekly payments significantly reduce interest over the life of the loan. While more frequent payments can reduce your daily interest calculation, the savings are usually not as substantial as perceived. Often the savings over the total loan term are in the hundreds and not thousands. Therefore, in our opinion, it is more important to align your repayments with your pay cycle to ensure you’re managing your cash flow effectively. Combine this with a robust loan structure and you will be all set.
Myth #7: “Paying off your mortgage faster is always the best strategy.”
While paying off your mortgage faster can save you interest, it’s not always the best approach for everyone. Allocating all your extra money to your mortgage can leave you cash poor, unable to handle unexpected expenses, or invest elsewhere. Striking a balance between paying off your mortgage and maintaining an emergency fund can often be a more stable financial strategy.
There are also home loan products in the market that can allow you to hold savings within the home loan or be used to offset the daily interest the bank is calculating on your home loan. By doing this it allows you to still access the funds at a later date if required.
Talk with one of our advisers to work through the best strategies for your home loan.
Myth #8: “You’d never be able to afford repayments on a home loan with a 6% interest rate!”
Interest rates are indeed a factor in determining your home loan’s cost. However, it is important to compare what the actual home loan repayments, plus costs associated with the property will be, versus how much you currently pay in rent, plus any regular savings and short-term debt repayments that might be about to end.
By doing this, you can establish how much you are currently able to afford in home loan repayments based on your current regular commitments that will no longer need to be met after you move into your home.
Don’t let a higher interest rate environment scare you away. Instead, work with one of our mortgage advisers to understand these factors and find a loan structure that suits your financial situation.
Remember, every home buyer’s journey is unique. What works for one person may not work for another. Always consult one of our advisers who can help debunk these myths and devise the best strategy tailored to your circumstances.
Lending criteria are always subject to change. The information contained in this blog is not tailored mortgage advice; please contact a Connect Me Mortgages Adviser to get tailored mortgage advice for your own financial position.
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