In this article we want to explore some of the myths about mortgages and allow you to make the most of your mortgage facility.

Myth 1 – Never lock in your interest rate

If your budget is tight, the certainty of fixed home loan repayments can lessen the stress. There are great fixed loans on offer and with economic growth slowing and unemployment increasing, this can be a good strategy for some. So, if you want certainty above flexibility, fixing may be for you. If you think rates may fall further, hedge your bets by locking part of your loan and staying variable on the rest.

Myth 2 – You need to have at least 20 per cent of the purchase price as a deposit

You do need a deposit, but some lenders still let you borrow up to 95 per cent of the purchase price. With a 20 per cent deposit, you can avoid expensive lender’s mortgage insurance (LMI). So, if you are borrowing more than 80 per cent, factor in the LMI cost, which online calculators show could be about $13,000 on a $475,000 mortgage buying a $500,000 home. Don’t forget about the other upfront costs, including stamp duty, which can add up to 3 to 5 percent of the purchase price.

Redraw facilities allow you to withdraw any extra payments you make on your loan, sometimes for a fee.

Myth 3 – A cheap home loan is always the best

It really depends on the features and flexibility you need. Basic loans, which have a low rate, usually allow you to make extra payments without charge. Some allow redraw, but often at a cost.

Standard loans cost more and have more features, such as splitting between fixed and variable rates, full or partial offset facilities and portability.

Premium or package loans have all the bells and whistles, and offer perks on other products. The drawcard is an ongoing interest rate discount of about 0.7 per cent or more, but the downside is an annual fee of about $400.00.

Myth 4 – Mortgage offset is always better than redraw

Mortgage offset involves having a separate account linked to your home loan. Amounts deposited in this account will be offset against your loan balance to calculate interest. In principle, both have the same impact, but offset accounts allow you more flexibility if you turn your home into an investment property – a possibility if, for example, you move interstate for work. Then your home loan becomes a deductible investment loan and the bigger it is, the bigger your tax deductions. The cash accumulated in your offset account can be used towards your new home, on which any borrowings will be non-deductible debt.

Offset accounts are available only with more expensive loans, which you may not need unless you have a reason, such as wanting flexibility to turn your home into an investment.

Source: Australian Women’s Weekly, September 2013 Edition

© Power Tynan Pty Ltd