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Buying a house can be an exciting time, but it can also be a confusing time when it comes to the jargon that is used for home lending. Finding financing that is suitable for your current financial situation is important, but it is easy to be stumped by the jargon that is used on your way there. We have put together a basic guide to home lending jargon that will make financing your home a bit easier.
Loan to value ratio (LVR)
You are likely to come across this term a lot when it comes to the home lending market. The loan to value ratio is an amount you need to borrow against the value of the property you have secured. This is calculated as a percentage of the lender-assessed value of the property. LVR is also something lenders use to determine whether lenders mortgage insurance will have to be paid.
Example:
- Ben and Susan are currently purchasing a new home to the value of $500,000.
- They also have a deposit of $100,000 (which exclude transaction buying costs)
- They will have to borrow a home loan worth $400,000
To find out their LVR Ben and Susan have to divide the mortgage amount by the value of the property and then multiply the amount by 100.
($400,000 ÷ $500,000) x100 = 80%
Interest only lending
This can be broken down into two parts; interest in advance and interest-only repayment. Some home loan options allow you to pay interest in advance which can have tax benefits. This option is usually available for fixed rate residential investment property loans only.
This allows you to pay a year’s worth of interest rate on your home loan in advance. Interest-only repayments, on the other hand, allow you to only pay the interest charges on the home loan and none of the principal.
This usually extends to a period of five years before the loan reverts to principal and interest payments. If you are not able to cover all interest payments over the period that has been given to you when the loan reverts to its usual charges you could end up paying more
Offset account
An offset account is a savings account that is linked to your home loan. The money that is in the account is used to ‘offset’ your home loan balance. It is important that you check if your home loan allows you to have an offset account attached to the home loan.
Example:
- You have taken out a home loan to the value of $300,000
- You have deposited $50,000 into your offset account
- You will now be charged interest on the $250,000 instead of the $300,000
However, the interest will only be charged to the $50,000 you have placed in your offset account for as long as you keep it there. Offset features usually come with variable rate loans. By taking the $50,000 out of the offset account can affect how much you pay on interest rate.
Comparison rate
The home loan market is flooded with various loans on offer with different interest rates, fees and features that come with it. Finding out how much the loan will cost over the life of the loan can get tricky with the various fees that are involved. This is where the comparison comes in. Comparison rates are designed to reflect the actual cost of a loan presenting the interest rate, lenders fees and charges that will apply during the life of the loan. It also shows you if a loan will revert to a different interest rate after a period of time. This can help you when it comes to comparing home loans and finding one that is suitable to your financial needs.
Lenders Mortgage Insurance (LMI)
Home loan lending can be a risky business, especially with the likelihood that people will default on payments. Lenders protect themselves through lenders mortgage insurance in the event that you are not able to pay your home loan. How much you pay on lenders mortgage insurance is determined by the amount you borrow.
As you continue the journey of financing your home you will come across more terms and processes that can be confusing. You are not the only one. It is always best to ask when you don’t understand a term or a process, which your home loan lender will be obliged to explain to you.
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This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.
The content on our website is produced by experts in the field of finance and reviewed as part of our editorial guidelines. We endeavour to keep all information across our site updated with accurate information.
Approval for home loans is always subject to our lender’s terms, conditions and qualification criteria. Lenders will undertake a credit check in line with responsible lending obligations to help determine whether you’re in a position to take on the loan you’re applying for.
The interest rate, comparison rate, fees and monthly repayments will depend on factors specific to your profile, such as your financial situation, as well as others, such as the loan’s size and your chosen repayment term. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, aren’t included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate.
