Home loan lingo is like the most boring game of Scrabble ever. There are so many terms to understand, and sometimes it can feel like bankers are making it hard on purpose.
Not at Summit Property Finance.
Let's decipher some buzzwords, so you can make a more informed decision.
Interest rate
Let’s start right at the beginning. The interest rate of your loan is the fee you’re charged for borrowing money, as a percentage of the loan amount. Even a difference of 0.1 per cent can save you plenty over the life of your loan, so it’s worth shopping around for the best deal.
Variable loan
It’s one of two main options you’ll have when you get your mortgage. A variable rate changes with the market. If your loan’s interest rate changes, your repayments will change, too. Good news for you when rates are low, but remember to plan for potential rises.
Fixed Loan
The opposite of a variable-rate home loan. The amount of interest you pay doesn’t change, regardless of what’s happening in the market. With a fixed-rate home loan, the rate is fixed for a finite period. So, you might have five years of the same interest rate before switching back to a variable rate.
Split loan
You can hedge your bets with a split loan. That’s when part of the loan has one kind of interest rate, and the rest has another. It means you can have a fixed rate and a variable rate for different amounts, so you can have the best of both worlds. Many borrowers like the flexibility.
Honeymoon or introductory rate
An introductory rate designed to entice customers. Usually it’s lower than market rates, so the appeal is obvious. But those low payments typically only last for six to 12 months before the whole loan reverts to a normal rate. Sometimes that “normal” rate is actually higher than average, so look closely at what you’ll be paying over the life of the loan.
Comparison rate
A comparison rate is a helpful way of explaining the cost of a loan including all the extra fees and charges. When you use comparison sites to find a loan, for example, this figure will help you compare like-for-like, without getting tripped up by shiny deals. Just be careful as every situation is different, so don't get fixated on this figure.
Interest-only loan
When you make your mortgage repayments, money comes off the loan. In a standard principal + interest loan, your payment covers the interest and pays down the actual figure you owe (the ‘principal’ – more on that later). With an interest-only loan, you just pay the interest. Your repayments will be lower, but at the end of the interest-free period, you’ll still owe the full amount of principal.
Offset account
A separate account where you can chuck your savings and have it ‘offset’ the amount of your loan by that amount. You can still access your funds and use the account for transactions, but any money in there will reduce the interest charged to your loan.
Redraw
If you make extra repayments on your loan (above the normal mortgage payment), you can take them out again later. Remember, though, that using a redraw facility will add that money back on to your loan balance. Investors take note - The ATO views a redraw and offset facility very differently.
Loan-to-value ratio (LVR)
This is how lenders plan for lenders mortgage insurance, which you’ll learn about when you read the very next item on the list. Loan-to-value ratio is, as the name suggests, the amount of your loan as a percentage of the value of the property. For example, borrowing $340,000 to buy a $400,000 property gives you an LVR of 85 per cent.
Lenders Mortgage Insurance (LMI)
When you borrow most of the purchase price of your property, it can make lenders a bit nervous. If you’re borrowing more than 80 per cent, you’ll probably also have to pay for Lenders Mortgage Insurance. That’s a policy that protects the lender if you default on your loan.
Stamp duty
A fun tax time! Stamp duty is the amount of tax payable when you buy a property. It differs from state to state, and in some cases depends on the nature of the property itself, but you’ll need to keep it in mind when thinking about how much buying a house will cost.
Principal/capital
The principal is how much you owe on the property. This is the ‘actual’ amount you’ve borrowed, and the balance on which interest is calculated. The faster you can pay this down, the less interest you’ll pay.
Deposit
Lenders want to see evidence that you can save, and getting a deposit together is a great way to do this. Your initial payment comes off the total value of the loan, so it’s in your best interests to save as much as possible. It’s standard to require a 5 per cent deposit, but having more than 20 per cent can save you a bunch in Lenders Mortgage Insurance.
Equity
As you pay down your loan, and the market changes (hopefully for the better), you’ll start to own a bigger share of your property. Equity is the difference between how much you owe and how much the property is worth. You may be able to access your equity to reinvest or make other large purchases at the lowest possible interest rate.
Refinancing
The loan you started out with isn’t always the right one long-term. Refinancing is when you take out a new loan to replace the one you already have. Some people refinance to secure a better interest rate, while others are attracted to new and better features.
Here at Summit Property Finance we can sort you out with the best products for your situation, from variable loan to offset account and everything in between. Home loans are complex beasts. There are so many options available and sometimes it feels like you have to be a banker just to understand what it all means.
