Buying your first home is a major milestone, but navigating the home loan process can be confusing, especially when you’re faced with unfamiliar terms and industry jargon.
Understanding key mortgage terminology can help you make more confident decisions, compare loan options more effectively, and avoid costly surprises. Here’s a simple breakdown of the most common lending terms every first home buyer in Australia should know.
Lifting Brisbane’s Profile and Lifestyle What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance, or LMI, is typically required if your deposit is less than 20 percent of the property’s purchase price.
Despite the name, this insurance protects the lender, not the buyer. LMI covers the lender if you can’t repay your loan. While it allows buyers to enter the property market sooner with a smaller deposit, it can add thousands to the overall cost of the loan.
It’s important to factor LMI into your budget and understand how it impacts your repayments over time.
Understanding Loan-to-Value Ratio (LVR)
Loan-to-Value Ratio (LVR) refers to the percentage of the property value you’re borrowing. For example, if you buy a $600,000 property with a $60,000 deposit, your LVR is 90 percent.
Lenders use LVR to assess risk. A high LVR can result in higher interest rates or the requirement to pay LMI. Reducing your LVR by saving a larger deposit can help you access more competitive loan terms.
What is stamp duty and how much will you pay?
Stamp duty is a government tax applied to most property purchases in Australia. The amount you’ll pay depends on the state or territory, the purchase price of the property, and whether you qualify for any first home buyer concessions or exemptions. The standard rates however are calculated based on a sliding scale, based on the property’s dutiable value (purchase price or market value, whichever is higher).
Stamp duty can be a significant upfront cost, so it’s essential to factor it into your budget early. There are online stamp duty calculators available to help estimate the amount based on your location.
Different between Principal and Interest vs Interest-Only Loans
Home loans generally fall into two categories: principal and interest, or interest-only.
With a principal and interest loan, your repayments reduce both the loan balance and the interest owed. Over time, this helps you build equity and pay off the loan in full.
An interest-only loan, on the other hand, only covers the interest for a set period, usually up to five years, so the loan balance stays the same during that time. While interest-only repayments are lower initially, the long-term cost is often higher, and it may take longer to pay off the loan.
How and Offset account can reduce your loan interest
An offset account is a transaction account linked to your home loan. The balance in this account is offset against your loan when interest is calculated.
For example, if your loan is $500,000 and you have $20,000 in your offset account, interest is only charged on $480,000. Over time, this can help you save significantly on interest and pay your loan off faster.
Offset accounts can also give you flexibility, allowing you to access your funds when needed while still reducing interest.
Fixed Rate vs Variable Rate Loans: What’s the difference?
With a fixed rate loan, your interest rate and repayments stay the same for a set term, usually between one and five years. This provides stability and makes budgeting easier.
A variable rate loan changes with market conditions, such as the RBaA’s cash rate, lender policies and your financial profile, meaning your repayments can increase or decrease over time. These loans often offer more flexibility, including the ability to make extra repayments or access redraw facilities.
Some borrowers choose a split loan, combining both fixed and variable components to manage risk and maintain flexibility.
The bottom line for First Home Buyers?
Understanding home loan jargon puts you in a stronger position when comparing lenders, negotiating loan terms, and making long-term financial decisions. From LMI and LVR to offset accounts and interest-only options, knowing what these terms actually mean helps you approach the property market with confidence.
Looking for a mortgage broker?
If you’d like a trusted mortgage broker to guide you through your next purchase, we can connect you. Get in touch with us today and we’ll make the introduction.