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Can you pass this property knowledge test?

How well do you know your home loan? Images: Getty
How well do you know your home loan? Images: Getty

We might know that property prices are softening and mortgage interest rates are increasing, but for a lot of Australians, that’s about where their property knowledge ends.

Alarmingly, levels of mortgage holder financial literacy has actually dropped this year, the latest data from Gateway Bank has revealed today.

Also read: Aussies are the richest people in the world – so why are we so negative?

In fact, across all bar one financial literacy metric, Aussies’ knowledge of key home loan terms has fallen since 2017.

So, can you answer what a lot of Australians can’t?

1. What is a redraw facility?

Just over half of respondents (56 per cent) knew this term, down from 60 per cent last year. Nearly 20 per cent (17 per cent) didn’t know if they had access to a redraw facility.

Answer: A home loan with a redraw facility allows the borrower to borrow money they’ve already paid onto the loan. It tends to come with variable interest rate loans.

It also gives borrowers the flexibility to inject spare savings into the loan with the knowledge they can redraw it if they need to.

Also read: More house price falls look likely unless regulators intervene

2. What is an offset account?

The percentage of Aussies who know the answer has dropped from 56 per cent to 53 per cent. One in five respondents (19 per cent) didn’t know if their current loan offered an offset account.

Answer: This is a savings account tied to the loan. Any funds channeled into this account are offset against the loan, so the lender reduces the amount on which interest is calculated.

3. What is home loan insurance?

Fifty-five per cent of respondents knew the answer to this one.

Answer: This is insurance for the borrower against the unexpected, like the homeowner losing their job, having an accident or dying. Its intention is to provide peace of mind that the mortgage would be taken care of should the worst happen.

Also read: Australia is the latest country whose banks are planning to abandon London as Brexit looms

4. What is Lenders Mortgage Insurance (LMI)?

Only 40 per cent of respondents said they were “definitely aware” of what this term meant.

Answer: This is insurance which protects the lender, and is designed to protect the lender should the borrower be unable to pay-off their loan. If your deposit is small, it’s likely you’ll be asked to pay LMI by your lender.

5. What is the difference between a comparison rate and an interest rate?

The largest drop in financial literacy was for this question, with only 31 per cent definitely aware of the difference, down from 36 per cent in 2017.

Answer: The interest rate is quite simple – it’s the rate of interest you pay on your home loan. A comparison rate is designed to help borrowers figure out the real cost of a loan, as it combines the interest rate plus most associated fees and charges. It helps borrowers compare loans between different lenders.

6. What is a loan to value ratio (LVR)?

A shockingly low 26 per cent of respondents knew this term.

Answer: This is the size of your loan compared to the value of your property. It’s expressed as a percentage, and can be worked out by dividing the amount you’d need to borrow to purchase the property by the property’s value.

For example, if you bought a property for $1 million and needed to borrow $800,000 to buy it, you’d have an LVR of 0.80, or 80 per cent when put as a percentage. Generally, LVRs of more than 80 per cent aren’t recommended.

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7. What is portability?

Only one fifth of respondents got this one.

Answer: This allows borrowers to keep their loan when moving to a new home, without needing to bother refinancing. Given the average loan length is between 25 and 30 years, it’s quite common for people to change homes while still paying off a loan.

8. What is a split home loan?

This was the only measure that improved since 2017, up to 34 per cent from 33 per cent. Additionally, 40 per cent of respondents didn’t know if their mortgage offered splits.

Answer: This is a home loan arrangement in which you can have both variable and fixed interest rates on your mortgage at the same time. This means your mortgage is divided into portions and an interest rate structure allocated to each of them. To some people, the split loan option is considered a compromise between the pros and cons of fixed and variable rate loans.

“Banks and brokers alike need to make it a priority to ensure that clients and members are given the resources and support needed to ensure they have a high level of understanding of the inclusions, exclusions and terms associated with their mortgages,” the CEO of Gateway Bank, Paul Thomas said.

However, borrowers also need to shoulder some of the responsibility, not only to avoid excessive payments but also to score better deals and packages.

“As with any purchasing decision, meticulous research and awareness is required if you’re to nab the best deals for your particular circumstances,” Thomas said.

“People will invest hours or days of research into purchasing a television or a computer, and the same amount of interest and time investment needs to be implemented when making one of the largest purchasing decisions of any one’s lives.”

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