The language and jargon used in purchasing a property can be very confusing. Here's a home loan glossary of of commonly used words and phrases.
A nominal interest rate incorporating certain fees and charges to help consumers identify and compare the true cost of a home loan.
When shopping for a home loan, people often focus on the advertised interest rate. While this is a useful guide to what you’ll pay, it doesn’t reflect the true cost of the loan because it excludes associated fees and charges, which can vary widely between lenders.
A comparison rate is a tool that helps consumers identify the true cost of a loan because it includes both the interest rate and fees and charges relating to a loan, reduced to a single percentage figure. It excludes government fees and charges that are standard across all loans.
According to the Code, comparison rates must be provided for any form of fixed term credit, regulated by the Code. This includes home loans that must be repaid within a specified time period (eg. 25 years).
A comparison rate allows you to compare ‘apples with apples’ and make a more informed decision when choosing a home loan. Because different loan amounts and terms produce different comparison rates, comparison rates in advertisements must be based on a standardised amount and term that is typical of the loan being advertised. For home loans, that’s a loan of $150,000 for 25 years.
This table summarises what is considered when calculating a comparison rate.
|The amount and term of the loan
|Government and statutory fees (eg. stamp duty)
|The repayment frequency
|Event-based fees and charges that may or may not apply (eg. redraw fees and early repayments).
|The nominal interest rate
|Fee waivers or discounts that may apply
|Upfront and ongoing fees and charges
|Fees and charges that are not ascertainable when calculating the comparison rate
The ratio of the amount lent to the valuation of the security (usually the house).
The LVR measures the amount of the loan compared to the value of the property being used as security for the loan, expressed as a percentage figure. From a lender’s perspective, the higher the LVR, the higher the risk to the lender.
The LVR is calculated by dividing the loan amount by the value of the property, then multiplying it by 100. The value of the property is determined by the lender’s valuer, and it may be different to the price actually paid for the property. As an example, if your property is valued at $250,000 and you borrow $200,000, the LVR would be 80% (200000 / 250000 x 100 = 80).
The maximum LVR that you can borrow up to depends on several factors including the type of loan, the loan amount that you’re applying for and your capacity to make repayments. Lenders consider loans with an LVR over 80% to be of higher risk and borrowers will generally need to pay for Lender’s Mortgage Insurance.
Some people are keen to buy a home but do not have a 20% deposit. If you do not have a 20% deposit and would like to borrow 80% to 95% of the property value, you may have to pay Lender’s Mortgage Insurance.
Lender's Mortgage Insurance (LMI) is a one-off insurance premium which is payable by the borrower and protects the lender against the loss it may incur if the borrower is unable to repay their home loan. LMI will usually apply when a borrower wishes to borrow more than 80% of the value of a property (that is, where your loan-to-value ratio (LVR) is greater than 80%) or, to put it another way, when your deposit is less than 20% of the property’s value.
The LMI premium may be included in your home loan, so you don't need to pay it upfront, but it will reduce the amount available for the purchase and will increase the amount of your repayments.
The amount of LMI you have to pay will depend on the state you purchase in and your LVR. The higher your LVR, the higher the LMI premium will be. LMI can be a deal breaker for some borrowers, so it’s important to work out what your LVR is likely to be based on your savings and projected savings.
Stamp duty is a tax you pay to your state or territory based on the value of your home. There are duty concessions for first home buyers in some states or territories, it's best to check what's available to you.
View our full list of glossary terms