If you’re a first home buyer, obtaining a mortgage can seem overwhelming and perhaps even confusing. Often, there’s jargon and terms you may not have heard of and, with something as important and serious as a home loan, you need to get your head around these mortgage terms quickly!
We advocate for financial literacy and want our clients to feel empowered and informed at every step along the way. To help you understand mortgages like an expert, we’ve put our heads together and listed the most common terms people find confusing.
Is an assessment of how much a home is actually worth. If you have an existing home you’re planning to sell, you will need to have your home appraised before it’s put on the market. If you’re trying to obtain a mortgage, your Lender may request an appraisal on the property you’re planning to purchase to ascertain its value.
Is a person that will assist you with the legal side of things when transferring ownership of a property. Typically, conveyances charge their fees through a percentage of the total sale or purchase price. These prices are secured during the settlement period where the sales contract is signed. Fees vary but may be around $1,000-$2,500.
‘Principal’ is the amount of money you borrow from a Lender when you take out a home loan, mortgage or other finance.
Principal and Interest
You may see the term, ‘principal and interest’ repayments when you’re looking for a home loan. Essentially, this means you will repay the original amount you borrowed, ‘the principal,’ as well as the interest that’s accruing. A benefit of having this kind of loan is that your principal amount is decreasing regularly as you make your standard repayments meaning your interest is also being reduced.
‘Interest’ is the fee the Lender charges you for the use of their money. This is typically a percentage of the overall amount you borrow. The interest charge on your loan will vary depending on the amount of money you borrow, the interest rate, the term of the loan and the frequency of your repayments.
‘Term’ is the agreed period you have to repay your loan. For some loans, this could be a year or less, while for most home loans it is between 25-30 years.
‘Loan Repayments’ refers to the regular payments you make over the term of your loan. These are typically monthly and generally cover the interest charge and a portion of the principal.
This term might sound scary but it’s just another way to describe the repayment of your debt. Over the term of the loan, your regular payments are said to ‘amortise’ or reduce the loan.
If you’re building a brand-new home, you will most likely need a construction loan. When you purchase an established home, typically the bank will provide you with your finance in one lump sum. When you have a construction loan, your finance will be paid in stages as your build progresses.
For more information on construction loans, read our blog, ‘How to Deconstruct a Construction Loan.’
Loan to Value Ratio, also referred to as LVR, refers to the proportion of money you intend to borrow compared to the value of the property. It will also help work out whether or not you will need Lender’s Mortgage Insurance (LMI).
Lender’s Mortgage Insurance (LMI) is a one-off insurance payment that protects the lender in the event you default on your mortgage repayments. People often misunderstand LMI and may not comprehend that this is not any kind of personal insurance, rather, it’s insurance to protect the bank’s liability.
In most instances, LMI is required if your home loan deposit is less than 20 per cent of the property’s value as assessed by the lender.
This refers to how much of your own money you have saved towards buying your home.
An offset account is a transaction account that’s linked to your home loan account. It can provide you with more flexibility and potential savings as it means that instead of being charged interest on the full loan balance, interest is charged on the loan balance minus the amount that’s in your offset account.
Positive and Negative Gearing
Negative gearing is a tax benefit you can claim if your borrowing costs are higher than the money you’ve made from an investment property. These losses can be claimed against your total income and increase your tax return and the income on your investment.
Positive gearing, on the other hand, refers to when the income from your investment property exceeds the cost of owning the property. It takes into account your loan repayments, interest and all other out of pocket expenses, like rates, water and maintenance costs.
Subject to Finance
When making an offer on a home, in many cases, it’s essential to include the term ‘Subject to finance and valuation’ in your contract. This will buy you time to arrange your loan and provides you with flexibility should your application be unexpectedly refused. It also means you can have the property valued to ensure its true worth is in line with what you have offered.
You may choose to have a guarantor on your loan. This may be a family member, friend or partner and is simply someone who is pledging their own finances or assets as collateral against your loan.
Most of the time you will be able to remove your guarantor once your LVR is at 90 per cent, however, this does involve refinancing. This may be an option worth considering if you don’t have a large deposit.
For more information on guarantors, read our blog, ‘Using a Guarantor to Purchase a Home.’
Now that you’ve got your head around some of the lingo, you should feel like you’re in a better position to understand the opportunities and considerations that come with purchasing a new home
If you’re still stuck and unsure of what something means, or if you find mortgage terms you don’t understand and you would simply like some further clarity, please don’t hesitate to reach out for a no-obligation chat.