Can we trust everything we believe to be true about applying for finance? We look at some great information to help you get the best deal on your home loan – and look at why a bad credit is something you should know about before you apply for a mortgage, to avoid being refused credit.

By Graham Doessel, Founder and CEO of MyCRA Credit Rating Repairs and www.fixmybadcredit.com.au.

Yesterday I read a great article in the Herald Sun titled “Time To Topple Mortgage Myths”. The article uses the information from top finance professionals to debunk five common mortgage myths. We look at the advice of those finance experts, and give you further advice as it relates to your credit rating and risk assesment. Here is the Herald Sun’s article:

Myth 1: Lowest interest rate loans are best

Unfortunately many borrowers will judge one home loan against another simply on the interest rate, which can be a big mistake.

If they make their decision on this “headline” rate, it could cost them tens of thousands of dollars extra, Resi Mortgage chief executive Lisa Montgomery says.

“Most borrowers don’t look at the comparison rate but they must,” Montgomery says.

“Check the comparison rate. It’s a great rule of thumb that helps you understand at a glance the true cost of a loan.
“It includes all the upfront and ongoing fees that need to be paid during the course of the loan.”

Fees and charges can add several basis points to the cost of the loan. Read the mortgage contract for all the details.

Whilst it is true the lowest interest rate may not always be the best, a high interest loan isn’t either. I am referring to a non-conforming loan used by people with negative listings on their credit report (or “bad credit”). In terms of saving money, this is seldom a better option. If there is any inkling that the bad credit shouldn’t be there, you will always save money if you can have your credit rating repaired by a professional credit repairer rather than continuing with a non-conforming loan – even if for only three years. For example, on a $300,000 loan – it would cost you $23,000 more in interest over the first three years at 9% interest, versus a more “mainstream” rate of say 7%. If you have bad credit, you should find out if you are suitable for credit repair before entering a high interest loan.

Myth 2: Bad credit ratings prevent borrowing

Your credit rating can both help or hinder the type of mortgage you are offered. If you have a poor record, it does not automatically mean you won’t get a loan.

But it can mean a lender will consider you a greater risk and want to charge a higher interest rate.

Not all unpaid bills and default histories will stop you getting the best deal.

Mortgage broker 1300HomeLoan managing director John Kolenda says defaults on utility bills or phone bills can be explained and overlooked.

“But it is very important to make sure you tell your lender about your history,” Kolenda says.

“Don’t let them find out when they do your credit worthiness search.”

It is not always the case that people are refused a home loan if they have bad credit, but it is never ideal. As mentioned above, depending on how high the interest rate will be – it may make more sense to look at those bills or other defaulted accounts that can be “explained” or which were unfair or mistaken and have them negotiated to be removed so as to get the best deal you can.

If you do want to discuss your options with your lender while knowing you have bad credit, yes it is very very important to be honest with them about your credit file. But where many people come unstuck and are refused credit is when they don’t know about it before they apply. This surprise bad credit can occur for a number of reasons, maybe the Creditor had the wrong billing address, or the default was a mistake, or you weren’t notified. Either way, it looks bad for you and means you fail that credit worthiness test. Surprise bad credit is often worth investigating to ensure the listing was put there lawfully by your Creditor.

Myth 3: Offset accounts are the best way to cut your interest

Financial research company Canstar analyst Mitchell Watson says there are much better ways to cut your interest costs than using an offset account.

“A lot of people will have their wages or salary paid into a mortgage offset account each month but for the average wage earner this isn’t going to be worth much at all,” he says.

“An offset account for someone on about $65,000 is only going to save about $20 a month interest. Over the life of the loan, however, it does add up to about $14,000.

“However, if you make fortnightly payments instead, so you divided the monthly amount by two and pay it every fortnight, you will save about $55,000 over the life of the loan and cut your loan term by four years.

“Better still, do both – use an offset (account) and fortnightly payments.”

Myth 4: If you pay off your credit card, you’ll be able to borrow more

Wrong. Even if you owe nothing on your credit card, the limit will still be counted towards your total potential outstanding debt, according to 1300HomeLoan.

“Your credit card limit affects your maximum borrowing capacity with some lenders. For that reason, you should reduce your limit or cancel the cards you are not using before applying for a home loan,” Kolenda says.

Even with new information provided for in our new credit laws which are in the process of going through Parliament, your credit limit, rather than the amount owing will be used to assess your debt level.

Myth 5: Pre-approved loans are pretty much guaranteed money

This is not true, the experts say.

Pre-approval is an offer to lend money based on a percentage of the property’s value.

The price you pay is not necessarily its value, Montgomery says.

“Always sign a contract of sale ‘subject to finance’ even if you have a pre-approval,” Kolenda adds.

“Your valuation needs to stack up and you will still need final approval.”

Are you sure the lender has done a credit check before providing the pre-approval?

The best course of action is – prior to applying for a home loan, request a copy of your credit report from Australia’s credit reporting agencies yourself. It is free once every year and will be mailed to you within 10 days. This way, you will know whether your credit file will let you down at the mortgage application stage and you won’t accumulate a ‘credit enquiry’ or any black mark against your name by letting the lender do the credit check and find out too late that you have problems that could have been fixed.

If you would like help to fix bad credit before applying for a home loan, contact a Credit Repair Advisor on 1300 667 218 or visit our main website for more information www.mycra.com.au.

Image: Stuart Miles/ www.FreeDigitalPhotos.net