We’ve seen it all before.
Someone starts talking about mortgages and you begin to see eyes glaze over. Polite nods and “mmhmms” are heard all around – but 90% of the group have already zoned out.
We get it. For us, mortgages may be interested and exciting, but for you, they’re just a necessary box to tick so that you can purchase your home or investment property.
That said, it’s still important that you understand a few key terms, so you know exactly what’s happening with your money – so we’ve broken down 5 of the most common ones.
Loan to Value Ratio (LVR)
The Loan to Value ratio reflects the size of the loan in proportion to the value of the property. You’ll see this number as a percentage, calculated by dividing the amount borrowed by the value of the property or purchase.
For banks, a lower LVR is more attractive as the mortgage presents less of a risk to the bank. This is because, should an owner default and the bank forces a sale, there is a lower chance that the property’s value will be less than the outstanding loan amount.
When a property is purchased with a higher LVR, the bank is taking on a higher risk, and this is usually reflected by the need for lenders mortgage insurance (explained below).
Set by the Reserve Bank of Australia each month, the cash rate is a benchmark from which interest rates for home loans and savings accounts are based.
Officially, the cash rate is the rate used when banks borrow or lend money to each other.
When the RBA lowers the cash rate, home loans become cheaper, encouraging borrowing and economic activity. When the cash rate is raised, the cost of borrowing increases, helping to moderate economic growth. The cash rate is usually increased in an effort to control inflation.
Currently, the cash rate is sitting at a record low of 0.1 percent, however, mortgage rates are generally a few points higher, reflecting banks’ profit margins.
When the cash rate is increased or decreased, the rate of your variable loan is also changed – but not always by the corresponding amount.
Also known as conditional approval, home loan pre-approval provides a borrower with a non-binding indication of the amount of money a lender may lend. This amount is given after a lender reviews their financial situation and is subject to several conditions, including a valuation of the property and further financial checks.
For buyers, this means they can begin looking for property, having a better idea of what properties they could and could not afford to purchase. This allows a buyer to confidently submit an offer or attend an auction.
Pre-approval is typical valid for 90 days, however, can be extended with updated information. It’s important that buyers arrange pre-approval when looking at properties to avoid disappointment. For buyers looking to purchase a property at auction, pre-approval is essential as auction sales are unconditional and cannot be subject to additional finance approval.
An offset account is a bank account that is linked to your home loan, designed to reduce the interest payable on the loan.
When determining the interest to be charged on the loan, any money held in the offset account is deducted from the loan balance.
For example, Sally may have a $600,000 loan with $60,000 in her offset account. When calculating interest, the bank only charges intertest on $540,000. No interest is earnt on the money in the offset account, however, by reducing interest payments, borrowers can benefit from increased household cash flow.
Keeping money in an offset account is like keeping money in a standard transaction account, however, provides the same benefits of making extra repayments, but with the added flexibility and no redraw limits or fees.
Lenders Mortgage insurance (LMI)
Lenders Mortgage Insurance or LMI protects the lender from a financial loss if the borrower defaults on their home loan and there is a shortfall in value after the sale of the property.
Generally, LMI is a one-off payment made by the borrower at settlement and is a requirement for loans where the LVR is above 80%.
Borrowers with smaller deposits often choose to pay LMI to get into the property market sooner. The alternative may be to have a parent act as a guarantor on the loan, allowing a loan to be approved without paying LMI. LMI is also often waived for borrowers in particular high-income professions.
Still feeling overwhelmed?
You don’t need to! It’s our job to make the mortgage process as simple and stress free as possible. Let us tackle the technical side so you can find your dream property. Contact us today at www.sanfordfinance.com.au/contact to get started.