When it comes to mortgages and finances there can be a lot of jargon to get to grips with, especially for first home buyers. However, it is essential that you are clear of what these key terms mean in order to fully comprehend this process of buying a property.
Here are our top seven key terms that we believe are important to know, which we have simplified into plain English.
1. Comparison Rate
A comparison rate helps consumers find out the true cost of a loan and this is advertised by lenders, allowing them to compare various loans from different lenders. It is made up of the interest rate as well as any fees and charges which relate to the loan and displays as a single percentage rate. Comparison rates are calculated using various factors including:
- Loan amount
- Term of the loan
- Repayment frequency
- Interest rate
- Fees and charges
2. Interest Only Loan
An Interest Only Loan is a loan where the interest is paid first, whilst the principal is paid in the later part of the loan term. However, the catch to this is that your original mortgage amount is not reduced. This interest-free period normally lasts for approximately one to five years before you will need to make both principal and interest repayments.
3. Fixed Interest Rate
A fixed interest rate simply means that the interest rate that is applied to your loan does not change for a set amount of time, even if the variable interest rate changes. This means that your repayments will always remain the same during this period which provides you with certainty. However, this type of loan can only be secured for a specific amount of time, usually between one to five years. Once you have reached the end of this loan term, you might be able to negotiate another fixed rate period, or it will convert to the standard variable interest rate.
4. Lender’s Mortgage Insurance (LMI)
Lender’s Mortgage Insurance, or more commonly known as LMI is an insurance that is taken out by the lender to protect them in case of financial loss if a borrower cannot repay the loan. This is generally required for loans that are for 80 per cent of a property’s value or higher and there is a cost involved for this. If you don’t want to pay LMI you will have to save up a deposit of more than 20 per cent.
5. Line of Credit
A line of credit is an arrangement between a financial institution such as a bank and its customer where the maximum loan balance that a bank will allow the borrower to maintain is established. The borrower is able to draw down on the line of credit at any time, as long as the maximum agreed limit is not exceeded. This money can be used for anything such as personal use, an investment or home improvements and can mean you never have to apply for another loan.
6. Offset Account
An offset account is a type of transaction account which can link to your home loan or investment loan. Its purpose is to reduce the interest costs on a loan and can help you save hundreds or even thousands of dollars over the lifetime of a mortgage.
Example: Your mortgage is $400,000 and your offset account has $20,000 in it. You are only charged interest on the first $380,000 of the mortgage, rather than on the full amount of $400,000.
7. Variable Interest Rate
A variable interest rate is where your repayments can change during the loan term, due to economic changes. This can either increase or decrease and you should have enough finances available to be able to still afford the repayments if the rate does increase.
Published on 27th of November 2014 by Marty Stanowich