Talking the talk when it comes to home loans
23/11/2023
Building or purchasing a home is an exciting time – from choosing a location in an area that suits you, to deciding which home design will be right for your lifestyle, and finally selecting the colour and design scheme – there is so much to look forward to!
With so many choices, there are a number of important decisions that need to be made, some of which you might not have ever considered, especially if it is your first time. Building a new home is a very different process to buying an established home, for example – and if you already own a house, refinancing is quite different from what you did for your original home loan.
Why is understanding “the lingo” important?
Understanding home loan terms is invaluable for individuals embarking on – or continuing – the journey of home ownership. This knowledge equips prospective homebuyers with the necessary tools to make informed financial decisions, and by understanding terms such as mortgage rates, credit score, and Lenders Mortgage Insurance, you can more effectively discuss lender offers with your mortgage broker, ensuring you secure the most favourable terms that align with your lifestyle and financial needs.
Furthermore, a thorough understanding of home loan terms can help you manage your budgets and plan for long-term financial stability. It will also help safeguard you from potential pitfalls like hidden fees or unfavourable loan structures, and help you to make sound financial choices with confidence. Being well-versed in home loan terms is an essential step towards achieving your dream of home ownership while maintaining your financial well-being!
Who is the best person to help you demystify the home loan jargon minefield?
A mortgage broker will be your number one asset when it comes to making the processes and jargon simpler to understand. A mortgage broker can provide advice and guidance on all of the financial aspects of the home loan process, and this begins with providing an estimate on how much a buyer can realistically borrow based on their earnings capacity.
An appointment with a mortgage broker is obligation-free and costs nothing, and a good mortgage broker (like those we have at The Loan Co!) should be the first port of call for those building or buying their homes, or refinancing their current mortgage. A quality broker has access to a broad panel of lenders and should be considered your personal home loan expert. We have an in-depth knowledge of the loans on offer and the processes behind them. We can also save you hours of time, stress and confusion by finding the right home loan option for you.
Furthermore, the language used in housing finance can sometimes come across as confusing, which is why we have put together this useful list of terminology – including some relatively new phrases that readers might not have come across before.
Read on to learn more!
Best Interests Duty (BID)
Best Interests Duty is legislation that was introduced in 2020 and designed to ensure that clients receive advice that meets their objectives, financial situation and needs, and that mortgage brokers are always acting in the best interests of their clients when providing home loan advice.
Formal Approval
Also known as ‘Unconditional Approval’, a home loan Formal Approval refers to the official confirmation provided by a lender to a borrower, indicating that their application for a home loan has been thoroughly reviewed and meets all the necessary criteria for loan approval.
The Formal Approval will typically outline the loan amount, interest rate, repayment terms, and any specific conditions or requirements that need to be fulfilled before settlement.
Credit Score
Also known as a Comprehensive Credit Report (or CCR), your credit score is a three-digit number – typically between 300 and 850 – designed to represent your “credit risk”, or the likelihood you will pay your bills on time, based on your past performance. The higher your score, the better.
Lenders will look at your credit score as part of their decision-making process of whether to approve you for a home loan. Your credit score may also impact the interest rate (and other terms or conditions) for your loan.
Guarantor
Someone (often a family member) that legally guarantees that the loan taken out by a borrower to a lender will be fulfilled, and assumes liability if the borrower fails to fulfill their repayments (i.e., defaults on the loan).
Lenders Mortgage Insurance (LMI)
If you have a deposit of less than 20% of the value of the house you wish to purchase (i.e., LVR over 80%), most lenders in Australia will charge you the cost of Lenders Mortgage Insurance, or LMI. LMI is an insurance that the lender takes out to protect themselves if you can’t repay the loan for any reason.
The cost of LMI will vary depending on your deposit and loan amount, and can either be paid upfront or added to your loan amount.
The Loan Company also has access to home loan options with no LMI and a low deposit.
Loan-to-value ratio (LVR)
When a lender is assessing your suitability for a home loan, they will look at the LVR, or what percentage of the property value you actually need to borrow.
For example, if the property’s value is $400,000 and you have a deposit of $80,000, this means you would need to borrow $320,000 (or 80% of the property’s value), giving you an LVR of 80%.
Mortgage rate
Mortgage rate is the rate of interest charged by a lender for a home loan.
Offset accounts
Mortgage offset accounts are linked to your home loan, and any money in the account is offset against the balance of your mortgage – thereby reducing the amount of interest you pay.
Pre-approval
A loan pre-approval (also known as ‘Conditional Approval’) confirms how much you can borrow from your lender. It is ‘conditional’ upon the property you wish to purchase being acceptable security, and your lender confirming your income and other information provided in your application.
Redraw
A redraw facility is a home loan feature that allows you to withdraw money you’ve contributed towards your home loan that is over and above your minimum required repayment.
It is different from an offset account, in that it is a built-in feature of your loan, rather than a separate account. However, unlike an offset account, there may be some limitations placed by your lender – such as a minimum redraw amount or a small fee for processing the redraw.
Repricing
Repricing is when you, or your mortgage broker, negotiate a new interest rate with your current lender without changing the nature or terms of the loan itself.
Target Market Determination (TMD)
ASIC’s Regulatory Guide 274 states that as of 5 October 2021, banks are required to have a document – called a ‘Target Market Determination’ – that captures what types of customers their loan products are targeted at. Mortgage brokers are now required to take these TMDs into consideration when determining what loan type best suits their clients.
As always, if you have any questions, would like a friendly chat about your options, or are interested in a free Home Loan Health Check, please contact us at any time here.
The above is provided for informational purposes only and is not intended as financial advice.
