Buying your first property can be an exciting time, but it can also be very confusing when you’re confronted with all the mortgage loan jargon. Understanding how home loans work in Australia and trying to navigate all the terminology can be tough for even the most experienced home buyers, but for first home buyers who are learning as they go, it can be totally overwhelming. The good news is once you’ve got an understanding of some key basics, you’re well on your way to cutting through the jargon and securing your first home loan.
Stamp duty is a government tax on property purchases and pays for the transfer of property from one owner to another. How much you pay depends on which state your property is in, but it can be a big up-front cost that could cost you tens of thousands of dollars. Factors such as purchase price or whether it’s an investment property can affect the fee, but if you’re a first home buyer, most states do offer concessions. To find out more, read our article on ‘Everything you need to know about Stamp Duty’.
The loan to value ratio (LVR) is the percentage of the total property price paid for by your home loan. This figure is one of the main ways lenders assess the risk that comes with lending you money. The LVR is calculated by your lender dividing your property’s value against your deposit to see how much you need to borrow from them.
For example, a $600,000 property with a deposit saved up of $150,000 will have a difference of $450,000 that needs to be borrowed.
Lender’s Mortgage Insurance (LMI) is a one-off payment on all home loans that protects lenders from a borrower who defaults on their loan repayments. Most of the time, if you have an LVR of under 80%, the lender will pay on your behalf. If you haven’t saved up a 20% deposit and your LVR is over 80% though, you will be charged this fee. As a rough estimate, this could cost you over $10K on a $500K loan if you only have a 10% deposit saved up.
(450,000 / 600,000) x 100 = 75% LVR
An LVR under 80% will give you a higher chance of approval as you have shown your lender that you have good saving habits so they can trust you’ll pay them back. Generally, the higher your LVR, the more risk you are to lenders. If your LVR exceeds 80%, you’ll be hit with some extra fees, the most common being Lender’s Mortgage Insurance (LMI).
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When you borrow money for a home loan, you’ll pay a percentage of your mortgage as interest until it’s completely paid off. This rate changes based on the market, but has typically fluctuated between around 4% and 6% over the last 20 years. When you are deciding which type of loan to go with, you’ll be choosing either a variable-rate loan or a fixed-rate loan.
This is the most common type of home loan in Australia and means that your interest rate will fluctuate over the life of your mortgage depending on the current rate of interest offered by your mortgage provider. Some months you may pay less interest, while others those payments can be higher.
A fixed-rate means your interest rates are set, no matter how much the market changes. These rates are generally fixed for two to five years and then they revert to a variable rate for the rest of the life of your mortgage. Fixing your rate gives you a level of financial certainty where you know how much your mortgage repayments will cost you each month, but, on the downside, you will miss out on any decreases in interest rates if they occur during the fixed period of your loan.
An offset account is a savings account that’s linked to your home loan. The money sitting in that account is used to offset your home loan balance which means the higher your savings, the less interest you pay. Not all home loans allow you to attach an offset account to your loan though, so it’s best to check with your lender.
Understanding home loan jargon and the financial terms that come with owning property can sometimes feel intimidating, but spending the extra time researching these terms will save you in the long run. If you’d like to know more, or need something explained to you, talk to one of our first home buyer specialists who will be happy to help with any questions you may have.