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Home buying jargon that a first-time home buyer should know

Last updated on February 22nd, 2021 at 10:58 am by Bill Tsouvalas

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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