What the mortgage?
Like pulling together the savings to buy your first home wasn’t enough of a challenge, then in come the banks bamboozling you with their jargon. Well, breathe a sigh of relief, in 5 minutes you can learn the key terms you need to know when applying for your home loan.
Before we get to the jargon, let’s first look at how a bank decides to issue a loan. The two main things the bank will consider will be:
- Are you a good borrower?
- Is the property going to be a good investment for the bank.
Assessing whether you’re a good borrower involves having the bank look at your income, liabilities and existing commitments, along with your current and projected level of expenses – things like groceries (non-discretional) and your online shopping habit (discretionary). Looking at all these things makes sure you can not only service your loan but still maintain your current lifestyle.
Part two, looking at whether the investment is good for the bank is a little more tricky. The bank will need to assess a number of things. Typically, the bank will look at the value of the property compared to the price you’re paying and whether the location is likely to experience volatile changes in value (things like this can happen in mining regions). It will also consider whether there are any restrictions on the property or land that could affect its ability to be sold in the future.
Makes sense? Okay let’s get into the terminology.
LVR: Loan to Value Ratio
You’ll hear this one quite a lot. It basically states the percentage of the loan in relation to the value of the property. The standard LVR to avoid having to pay lenders mortgage insurance (LMI – definition to come!) is 80%, which means the bank will loan approved applicants 80% of the value of the property. This means you need to contribute the remaining 20% of the value of the property as well as having enough money to cover the other associated costs of buying a property – stamp duty, legal cost etc.
It’s important to note though, not all lenders require an 80 per cent LVR to avoid LMI – this varies from bank to bank, so talk to your lender and seek your own financial advice.
LMI: Lenders Mortgage Insurance
Lenders mortgage insurance (LMI for short) is an insurance policy which covers the mortgage lender against the losses they may incur in the event that the borrower can no longer pay loan repayments (an event known as a default on the home loan). Here’s a little table to give you an idea of how much it will cost you – it will vary depending your deposit and how much you’d like to borrow.
LMI premiums for first home buyers
Estimated property value
95% LVR LMI cost
90% LVR LMI cost
85% LVR LMI cost
Fixed rates:Fixed rates give you certainty about what your loan repayments will be and the total interest you will pay over the fixed term period of your loan. It’s a good option if you don’t have plans for big changes during the period you ‘fix’ for or if certainty is important to you. In short, your payments are locked in for a specific time frame. Great for risk adverse individuals!
Or if you’d prefer to roll the dice…you could look at a variable rate. These rates can go up and down depending on the Reserve Bank of Australia and other variables. This might make it cheaper sometimes and more expensive at other times. It provides other advantages, such as being able to make additional repayments as you can afford them (and redrawing these extra payments as necessary). That means you can pay off your loan sooner with more flexibility.
Conditional approval, or pre-approval, means the lender has assessed you and your suitability as a a borrower and is happy to loan to you, subject to completing their verification process. This means you can go house shopping with confidence! The final purchase is conditional on the bank’s assessment that the property you select is suitable and involves verification of the information in your application. Full approval combines the bank’s assessment and verification of you and your property.
So that’s enough to get you started! It’s not absolutely every banking term you’ll come across, but you can learn those as you go. These are the critical terms to help you on your home buying journey. Of course, I am happy to help too! Please get in touch and I’ll be with you every step of the way.