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Knowledge is power in the mortgage game. Here are some of the key terms and definitions you should understand when navigating the housing market.
Buying a home can be exciting. Organising a home loan may be a bit more intimidating.
When entering your home loan agreement, it is important to get the best arrangement and the home loan that is right for you.
LVR is short for loan-to-value ratio, and is simply the proportion of money you are borrowing compared to the value of the home. So if the home is worth $500,000 and you borrow $400,000 your LVR is 80%.
An LVR of 60% is much more attractive to a lender than 90%, which gives borrowers more bargaining power.
Lenders want to protect themselves if you are unable to pay your mortgage, so, on riskier loans, they take out lenders’ mortgage insurance (LMI).
The catch is that they don’t pay for the insurance. You do.
The Australian Securities and Investments Commission (ASIC) MoneySmart website1 says LMI is usually a one-off cost to the borrower, payable when the amount borrowed is more than 80% of the value of the property.
It’s a common misconception that LMI protects borrowers if they can’t pay, but it is only the lender who is insured.
A key facts sheet sets out important information about a home loan that allows you to see how it stacks up against other mortgages.
ASIC says the best way to compare home loans is to ask for a key facts sheet from different lenders. From 1 January 2012, all lenders offering standard home loans must give you a key facts sheet when you ask them. Credit providers must provide key facts sheets for home loans when asked, but they are not required for line of credit loans or interest only loans, ASIC says.
The key facts sheets provides information such as:
(Source: ASIC, Factsheet: Home loans)
A good strategy for home buyers may be to get the finances sorted before making an offer.
Pre-approval for an agreed loan amount can provide peace of mind.
Pre-approval is not compulsory but it can avoid finance issues and signals to sellers that you are a serious buyer.
Pre-approval applications though are recorded on your credit file each time you apply, so be careful about making multiple pre-approval applications as it could impact your credit ratings.
Moving house has become so prevalent that some lenders offer loan portability.
This allows people to transfer their existing loan to a new property without having to go through refinancing.
Portability is usually only offered to variable rate loans.
Find out more here about the basics of home ownership and how to finance that dream.
1. Australian Securities and Investments Commission, MoneySmart, accessed 29 November 2019 at www.moneysmart.gov.au/glossary/l/lenders-mortgage-insurance-lmi
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