Scratching your head about loans for doctors to borrowing money for your home, investment or medical practice and don’t have the time to research? We can’t blame you, it can get a little bit… too much at times. Let our team of lending experts decipher the information and present you with the 6 most common misconceptions about borrowing.
Misconception #1: Your current bank will reward your loyalty with a good rate
Loyalty Shmoyalty. One could argue it no longer exists. The bank that holds your savings or current home loan will rarely reward you with the best mortgage deal.
While some banks do reward loyalty, it always pays to shop around in this competitive environment. A little legwork by your broker can save you thousands. Some lenders are also ‘throwing’ money (anywhere from $2k-4k) to win new home loan customers.
Often, it also takes the “threat” of refinancing to get your current lender to scrummage around and provide you with their best offer to keep your business. It more often than not costs more to win new clients than it is to retain existing ones. Get a specialist broker to do some hunting around for you.
Misconception #2: You can easily afford and demonstrate your borrowing capacity on today’s rate
FACT: Yes…. BUT
Effective Rate versus Bank Benchmark rate.
Put simply, while your existing or proposed loan may be at a rate of say 2.5%, the Australian Prudential Regulation Authority (APRA) requires the minimum interest rate buffer for lenders to use when assessing the serviceability of home loan applications at a 3% margin so say 5.50%.
This ensures that banks are lending to borrowers who can afford the level of debt they are taking on not just today but also into the future should rates rise.
Misconception #3: ATO debt, HELP debt and credit card don’t have much impact on borrowing capacity
FACT: Not quite this simple
Comprehensive credit reporting ensures lenders have ‘shared’ access to all your liabilities across all institutions; including the government. So owing the government money is considered a liability which needs to be accounted for.
If you earn $200k p.a. but have a “small” HELP debt of say $40k, your annual repayments towards this debt is 10% of you income or $20,000. While the debt is relatively small, the annual commitment is assessed on the level of income rather than the amount owing and this, in turn, erodes your borrowing capacity significantly. In some situations, it may be prudent to consult a specialist medical tax adviser and consider paying the debt out earlier if seeking to apply for a loan; depending on how your borrowing capacity looks like with that annual commitment.
Similarly, owing the government back taxes will appear on tax portals and in some cases, where payment arrangements have not been entered into, this debt can also be recorded on the customer’s credit report. If there is an ATO payment plan in place, the monthly repayment is classified as an expense by lenders and would need to be disclosed and accounted for when assessing borrowing capacity. Having foresight from an expert medical accountant regarding future tax obligations can assist you to better plan and even fund them.
More on this topic – Beware of ATO debts when applying for loans
One of most common misconceptions is that if you pay the balance on your card to zero each month, or just have the occasional card that you only use when travelling and for the remainder of the year it sits in the back of your wallet, that these are not considered liabilities. When in fact, lenders will assess your borrowing capacity based on the limits of your debts (mortgages, credit cards, etc) and not the balances as these facilities provide you with the opportunity to borrow up to those limits at any time. Paying off your $30k credit card each month and not accruing any interest charges is great but it is still considered a $30k liability when it comes time to have a loan assessed. So, before applying for a home loan, review any cards you don’t use. And if you do use them, maybe look at reducing their limits as much as you possibly can, or chat to your lender about it! Oh and if you use Buy Now Pay Later (BNPL) services such as Zip Pay, After Pay etc, please note that these are just like your credit cards, they are still considered as liabilities.
More on this topic – Good Debt Bad Debt: tips for Debt Management
Misconception #4: You need a 20% deposit plus stamp duty to buy a home
FACT: Not necessarily
As a doctor, many lenders will lend you 90-95% of your home purchase without lender mortgage insurance. There are also some lenders that can lend 100% of your purchase using a family guarantee (usually from parents) as security which is supported by a mortgage or second mortgage over the parent’s home or investment property (assuming they have sufficient equity). With the high costs of renting and the difficult road to saving for a deposit, you may be able to access home ownership earlier than you think.
Misconception #5: The cheapest loan is always the best
FACT: Umm. maybe.
While you may pay lower interest, the cheapest loan may not always be the best. You need to consider the terms of the loan before making a decision, as some terms will be more attractive than others, such as:
- having an offset account linked to your home loan or the option to make additional repayments and redraws for free can help you save significantly over the life of the loan and pay it off faster.
- being able to borrow more at a slightly higher rate.
- a loan that requires repayment in a short time frame with a low interest rate vs loan with a marginally higher interest rate and a more attractive / longer repayment period that will have a lower monthly repayment overall.
- lender Credit Policy is always crucial when deciding where to apply as each has different credit criteria regarding how they assess base income, overtime, self-employed income, loan value ratio against certain property sizes and locations.
- timeliness of credit decision – some lenders can provide a pre-approval within 48 hours while others can take 4-6 weeks.
- branch network vs online banking.
- Relationship manager with health/medical sector knowledge and specialisation.
Misconception #6: Find a house, then worry about a mortgage
FACT: May the odds be ever in your favour.
This is bad advice at any time and will create unnecessary stress to both you, your broker and your lender; and in some instances, should finance fall through you may risk losing your deposit.
Get pre-approved for a mortgage before you start seriously looking at homes. A pre-approval means that the mortgage lender has reviewed your financial information and is willing to lend you up to a specific amount of money.
If you would like to learn more or discuss your personal situation with a DPM Lending Consultant who specialise in the medical sector, book an appointment online today.
Disclaimer: * The information contained in this site is general and is not intended to serve as advice. DPM Financial Services Group recommends you obtain advice concerning specific matters before making a decision.