Getting Familiar With The Most Important Home Loan Terms
There’s so much excitement that comes when you’re looking for a home to purchase for your family, particularly if it’s your first home. However, the world of home loans and mortgages can feel a little like the Wild West to the unfamiliar, and it’s easy to get tripped up by new terms and words that are important for you to be aware of when you begin your journey. To save you some time and mental effort, we’ve compiled some key terms and phrases that can help you on your path to home ownership.
Be encouraged – these terms are not as complicated as you may believe!
Key terms when discussing home loans
Here are the terms that are most important for you to understand in the home loan world…
– Comparison rates: Comparison rates are easy to understand in principle, but can be difficult to fully understand in reality. Lenders use comparison rates to give consumers the chance to identify the ‘true’ cost of a loan once all fees and factors have been accounted for. This rate includes both the interest rate itself and other loan fees and charges. These figures are then added together into one percentage rate that also relates to the term of the loan, the frequencies of repayments, other fees and charges and the actual standard interest rate. This allows borrowers to look at true costs from lender to lender, as opposed to comparing interest rates alone and not accounting for other built-in and unavoidable costs that come with that interest rate.
– Lender’s Mortgage Insurance: Lender’s Mortgage Insurance is a common insurance for first home buyers to consider, as it can assist them in getting into the property market faster with a smaller deposit. This insurance is taken out by the lender on the loan and protects them in the case of borrower default on the mortgage payments. It’s common practice for this insurance to be a conditional of lending if the loan is 80 percent or higher of the property’s value. One thing that’s important to understand, however, is that this insurance only protects the lender, not the borrower.
– Offset Account: An offset account is an attractive home loan feature for many buyers. This is because it is an account that is directly linked to your loan account (or mortgage), where any amount that is put into the offset account is used to reduce the principal of the loan when it comes to the calculation of interest. This is a great perk for buyers, as it allows them to use lump sums (such as savings or regular wage payments) to reduce the amount of interest calculated and owed on their mortgage. It also keeps their cash free, as it can be used from the offset account with no impact on the mortgage aside from the amount that is calculated against the principal.
– Interest Rate: We’re all familiar with the term, but understanding interest rates becomes paramount when you’re considering signing on the dotted line. An interest rate is the rate of interest that the lender sets on the cost to them of lending you money so that they’re able to make a profit from your loan and keep themselves in business. There are two types of interest rates that are important to understand. These are variable rates and fixed rates. Variable interest rates can move up or down at any given moment and at the lender’s discretion. A fixed interest rate, by comparison, remains the same over the set period of time, making this an attractive option for buyers who are looking for as much certainty in their repayment schedule as possible, even if that means signing up at a slightly higher interest fee in order to lock it in for a longer period.
– Honeymoon Rate: This is a tool lenders use to pull customers in. By offering a ‘honeymoon rate’ at the beginning of a loan period, they’re able to convince buyers to bring their loan to them by offering them a lower interest rate for the beginning of a loan period (often 12 months). After the honeymoon period wears off, the rate increases. Although this may look attractive from some angles, it’s important to do the calculations on the increased rate once the honeymoon period ends to ensure you’re not paying more in the long term for the benefit of paying less upfront.
– Account: This is a term you’ll already be familiar with from your personal and family banking, as well as your everyday life. An account is simply the arrangement with a bank or other financial institution that allows for the debit or credit of funds, as well as the associated record of those transactions and funds.
– Borrowing Power: Borrowing power is a crucial term for you to familiarise yourself with very early on in your home loan journey. Borrowing power is simply the amount that an individual or organisation can borrow. If you’re single, this will be the amount you can borrow, and if you’re a part of a couple, it will be the amount you can borrow combined if you’ve both chosen to do so. Borrowing power is calculated by looking at income, regular expenses, existing debt obligations, family size and earning capacity, and a variety of other factors. By figuring out what your borrowing power is early on, you’ll be armed with the information you need to understand your purchasing abilities and price range limits.
– Mortgage/Home Loan: A mortgage, or home loan, is an agreement that has been struck between a lender and a borrower. The borrower uses property or collateral to secure borrowed funds from the lender to purchase said property.
– Stamp Duty: Stamp duty is one of those unavoidable parts of life, like a trip to the dentist… this is the term used to describe the tax that is imposed by a state or territory government which is incurred when purchasing a property. Stamp duty rates vary from state to state, and there are also some concessions available for certain buyers. These rates can be high, so stamp duty costs must be factored into the overall loan when considering how much you’re able to afford as a purchase price.
There are many elements to consider when buying a property, and although you’ll find you soon get your head around these terms, bringing in the help of an experienced and highly knowledgeable mortgage broker is always going to be more beneficial to your buying journey in the long run. The best part is – you don’t even pay their fee, the lender does! You have nothing to lose, and much to gain. By enlisting the services of a mortgage broker, you can ensure you’re accessing the most up-to-date industry advice and considering a mortgage’s pros and cons from the perspective of your unique situation. Trust in them to do the maths and the hard work on your behalf, and focus on the exciting part – choosing which property will be your new dream home and provide a safe and happy roof over your family’s heads.
Together, you and your mortgage broker will make a great team!
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