So, you’re ready to start the whole be-an-adult-and-buy-a-house thing? Congrats!
But in an instant, you start hearing your parents, lenders and mortgage broker speak a whole different language.
And it’s not a language you know smarty pants (we get it, you learnt six words of French when you strolled through Paris with your French lover Pierre). This language is formally known as the mumbo-jumbo-mortgage language.
There are many words you’ll need to know when you’re applying for a home loan - but let’s start with just 5. It’s only day one. We’ll give you the 411 on home loans - so you can be smarter than your mortgage broker and banker. They won’t know what hit ‘em.
A home loan deposit is your initial contribution to the purchase price of a property. It means that you own a small portion of the home. Woo hoo! It may be small, but hey - you’re one step closer to posting that highly sought-after Instagram in front of the SOLD sign. Isn’t that the real reason we buy property? It’s all for the gram.
Inspo for your “I just bought a house, suck it, random people from high school who haven’t unfollowed me yet” insta.
Lenders normally require your initial contribution (i.e a deposit) to be at least 20 per cent of the property price. If you’re just trying to get your head around this, check out home loans from UBank’s UHomeLoan - Discount Offer and loans.com.au's Smart Home Loan 80, which both require a 20 per cent deposit (or 80 per cent loan to value ratio).
2. Loan to Value Ratio (LVR)
If your eyes just glazed over when you read the word ratio, never fear, Mrs Anderson’s math class is finally coming in handy. LVR is the amount you are borrowing compared to the value of the property you want to buy. Put this as a percentage and bob’s your uncle - you’ve got your LVR. The remainder is your deposit.
The reason you need to care about the ol’ LVR is because this is what lenders commonly use to assess the risk of a home loan. Once the LVR exceeds 80 per cent, it’s generally a little risky for the lender, so they may ask you to take out Lender’s Mortgage Insurance. Lender’s whaaaaat?
Me trying to seduce my mortgage banker with my risky, high LVR.
3. Lenders Mortgage Insurance
If you can’t muster up a 20 per cent deposit, you’ll need to come to the bank armed with Lender’s Mortgage Insurance (LMI) or have a guarantor “guarantee” your loan (*cough* hi rich Aunt Doreen).
Lenders Mortgage Insurance is a once-off, non-refundable fee used as a security for the banks. It basically means, if you can’t pay back your loan, your insurer will be forced to cover it (this is def not recommended though).
The more cash you can cough up and put towards the purchase price of your property, the lower your LMI cost will be.
Finally, everything’s coming up Milhouse.
4. Fixed vs Variable
Okay, so now your bank is considering lending to you. They’ll ask you the age old question: fixed rate vs variable rate? Sooo ahhh, what exactly is the difference?
French lovers may come and go but at least with a fixed rate your payments will stay the same for a period of time. This will let you plan your future and protect you against potentially rising interest rates (it can’t get much lower than right now, surely). But just remember, if rates do fall further, you won’t get the benefit of that reduction. Home loans like Macquarie’s Basic Home Loan and Loan.com.au’s Special Offer Fixed Rate Home Loan have some great low rates in the market.
If you’re more of a live-in-the-moment type, your variable rate home loan might suit you better. A variable rate is where your interest rate can rise and fall throughout your loan period. On the plus side, you might be able to pay off your loan sooner by using falling interest rates to your advantage. Home loans like Athena’s Celebrate Variable Home Loan and 86 400’s Neat Home Loan have some great interest rates in the market.
When you’re trying to calculate what’s better, fixed or variable rates.
5. Stamp duty
No, stamp duty is not the task mum gives you as an 8 year old, sending out Christmas cards - it’s a fancy way of saying tax-on-home-purchase. Stamp duty is a percentage of the purchase price that varies by State - so the pricier the house, the higher the stamp duty cost will be (sorry first-time mansion buyers.)
Unfortunately, you’ve got to pay this bad boy upfront and it can’t be covered by your home loan.
Everyone at the bank when they hear you drop these words correctly.
Our advice? Now that you’re armed with the mumbo-jumbo-mortgage-lingo - get your nose outta the books and into the property market!
Disclaimer: Flux Technologies. ABN 86 634 507 172 is an authorised representative (1283166) and a credit representative (525288) of Mozo Pty Ltd who is the holder of AFSL and ACL No 328141. Flux may be paid by product issuers for clicks on the product links in this article. If you decide to apply for a product you will be dealing directly with that provider and not with Flux. Flux recommends that you read the relevant PDS or offer documentation before taking up any financial product offer. Any product advice presented is of a general nature only, and is not to be taken as any sort of advice as it has not taken into account your personal circumstances, objectives, financial situation or needs. Check out our Financial Services and Credit Guide for more information.