Home Loans 101

LVR stands for Loan to Valuation Ratio. This is expressed as a percentage and measures the loan amount compared to the property’s value. For example, if you have borrowed $180,000 and your property is valued at $200,000, the LVR would be 90%.

Lenders Mortgage Insurance (LMI) covers the lender or bank, in case the borrower defaults on their loan. If the property is subsequently sold, and the amount from the sale is insufficient to pay off the loan in full, this insurance will cover the lender for the shortfall. An external company usually provides insurance to the lender, but some large lenders have in-house mortgage insurance.

Fixed Rate Home Loans have repayments that remain the same for an agreed period (the fixed period), and then at the end of the term, revert to a variable rate.

A Variable Rate Home Loan has an interest rate that can move up and down according to fluctuations in the housing market – and therefore your repayments can also fluctuate up or down.

You should consider a fixed rate if you want the certainty of knowing what your repayments will be and therefore help you budget, not to try and “beat the market” as breaking out of a fixed rate (fixed term) loan contract could cost you thousands of dollars.

The Comparison Rate aims to help you make a more informed decision on the costs associated with a loan and help you to compare various loans offered by mortgage providers. A Comparison Rate reflects some of the costs of a loan into a single interest rate.

The Consumer Credit Code regulates the formula for calculating a comparison rate, and all Australian financial institutions and mortgage providers use this same formula.

It includes the interest rate, plus standard fees applicable to that loan. It avoids borrowers being misled by lenders advertising a lower interest rate but charging high fees to compensate for the low rate.

Most home loan repayments are calculated on a 30 year repayment term. A Principal and Interest repayment (P&I) is where the principal and the interest are repaid together throughout a loan’s term. Whereas, an ‘interest only’ (I/O) loan allows you to pay only the interest on the loan for a certain period.

For tax reasons, I/O is the preferred method of repayment on an investment loan and P&I for owner occupied loans. However, you can get either repayment option on both types of loans. So if you opt for an I/O term of 5 years, at the beginning of the 6th year, your P&I repayment will be higher than if you had just left your loan P&I from the start – as you now only have 25 years to pay down the principal.

You should make sure you have enough saved to cover the stamp duty, registration, insurance and legal costs that are associated with any loan that you take out, irrespective of the lender. As a guide, you will generally need to have between 5-10% of the value of the property available to cover these costs. If you have an unused credit card or personal loan facility, you could get away with even less than 5% savings.

To work out the exact cost it is best to speak to an expert for your specific scenario.

A pre-approval is an approval that is given confirming that you can afford the loan based on your current circumstances. It is subject to conditions, for example, acceptable security or verification of income. It is not binding on the lender who provides the pre-approval and is usually given before you find a property or before formal approval.

BEWARE some lenders/banks will give you pre-approval on the spot. These are merely computer generated decisions that do not check anything. At Home Loans Fast, we make sure we get a pre-approval that is looked at by a human being (a credit assessor) – so there are no surprises later when it comes time to buy.

In most cases, Home Loans Fast will be able to give pre-approval within 2-4 business days after we submit an application. This is dependent on the bank as sometimes they can get an influx of applications due to a promotion they are running, and it may take a little longer.

For a Purchase – You may borrow up to 95% of the purchase price or the bank’s valuation of the property – whichever is less. Depending on the lender, the mortgage insurance may or may not be added on top of this 95%.

For a Refinance – You may borrow up to 90% of the bank’s valuation of the property. Depending on the lender, the mortgage insurance may or may not be added on top of this 90%.

If you would like to get a rough indication of your borrowing capacity click here.

Yes. Variable rate loans only have an approx. $350 discharge fee. However, if you have a Fixed rate loan, it may attract a break cost if repaid within the fixed rate period. It is not possible to determine this beforehand as it depends on the economic cost to the bank, of breaking its hedged position on the money market. It is not uncommon to have this figure be in the $1000s depending on the loan amount and the time left in the fixed rate and the variable rates at the time.

An offset account is a transaction account attached to a home loan. The balance in the offset account is taken away from the principal remaining on the loan for interest calculation. Your repayments will stay the same with an offset account. What will change is the proportion of the amount of your repayment that goes towards the loan amount vs the amount that goes towards the interest component. Because the offset account lowers the interest due on your loan, more of your repayment goes towards the actual loan amount, known as the ‘principal’.

For illustration purposes, let’s say your monthly repayment is $2000 -> of which $1500 is interest, and $500 is Principal. So you might have a $200,000 loan and $15,000 in your offset account. Because of your offset account, you will only be charged interest against $185,000. You still pay $2000 per month, but because of the offset, $1400 is going towards Interest and $600 is Principal. So in this example, a bigger portion of your monthly repayment is going towards paying down the loan because you are being charged interest on $185,000 instead of $200,000. Of course, if you take the $15,000 out to buy a car, then there will be no interest saving! Usually, a bank will charge a fee for this feature, and it can range from $5 p.m. to $395 p.a. To justify this fee, this usually works well with larger loan sizes and a reasonable amount of surplus income.

A redraw facility allows you to take back any money that you have ‘overpaid’ into your home loan. For example – if your minimum home loan repayments for the year are $15,000, and you manage to pay $20,000 then you would have $5,000 available in redraw that you can take out anytime.

A redraw facility and offset accounts are useful tools and could help you pay off your mortgage sooner if used wisely.

The value of the portion of the home that you actually own – as opposed to the debt, which your bank or another financier owns. In other words, the amount of money you’d have if you sold the house and paid off your home loan. If you own a $200,000 home with a $120,000 loan, you have $80,000 of equity; if the market suddenly values your home at $220,000, your equity jumps to $100,000 while your loan stays the same. Your equity and debt in your home will together represent the home’s value.