Just like any new situation that puts you out of your comfort zone, the first step to feeling confident is to do some jargon busting and learn the meaning of some of the key terms, so you can be on your way to making informed decisions!
Lender's Mortgage Insurance (LMI)
Lender's Mortgage Insurance is applied when a loan is greater than 80% of a property’s purchase price. It is there to protect the banks, not the consumer. In a way, it helps those who can’t save a large deposit, giving them an opportunity to purchase a home. If you can save a deposit of at least 20%, and therefore need to borrow less, you will not have to pay LMI. Depending on your lender, you can pay for LMI upfront, or it can be rolled into your home loan.
Fixed loans allow you to lock in a specific interest rate over a set period of time, generally between one and five years. This loan is popular among borrowers who want to ensure their repayments don’t rise. The main risk is that if variable rates fall, you are locked in at a higher rate. The cost of breaking a fixed rate loan contract can be substantial, and there can be financial penalties for making additional payments.
Variable loans are loans that are subject to interest rate fluctuations. Whenever your bank increases or decreases interest rates, you will end up either paying more or less for your loan, depending on what the bank has decided to do.
An offset account is a savings account that is linked to your mortgage, allowing you the benefit of using these funds to reduce your loan liability and the amount of interest you need to pay on your loan, but it doesn’t replace the need to make repayments.
Some loan packages require evidence of genuine savings, which means money saved over a period of time rather than gifted in a lump sum by a parent or benefactor.
A mortgage broker will help you find the right finance solution when you are in the market to buy a new home or investment property. They are not aligned to one lender so they can review a range of solutions to find the best suited for your situation.
Mortgage lenders require you to provide evidence of your ability to meet loan repayments, but this can be a problem for non-salaried workers such as the self-employed or small business owners. Low-doc loans require less proof-of-income paperwork, but the interest rate applied is often higher than the standard variable rate.
Conveyancing is the legal term for managing the exchange of real estate of one party to another. A conveyancer is a legal professional who will assist in the preparation of contracts of sale, perform necessary title research, calculate rates and taxes applicable and liaise with financiers, to ensure your purchase can happen without incidence.
A guarantor for a loan is a family member who can use the equity in their home as additional security to help you obtain a loan. This guarantor will be liable for the loan if you fail to meet a payment commitment.
These loans allow amounts of finance to be drawn down progressively to cover the various stages of a construction project, to align with standard Housing Industry Association building contracts. Repayments (generally only on interest for the first 12 months, then principal and interest thereafter) are only made on the amount of the loan facility that has been drawn down. These are specialist loans and need to be discussed specifically with your bank or mortgage broker.
So now that you're familiar with all the lending lingo, we hope you're feeling empowered to get out there and kick some goals! Visit one of our 23 Display Centres across Melbourne to start your home building journey!