Home Loan Terminology You Should Understand Before Applying for a Loan

Applying for a home loan to purchase a new property can be exciting and confusing, especially for first-time home buyers. Initially to need to work out how much you need to earn to get on the property ladder. When you begin to compare loan options, you may find a variety of terms that you are not familiar with. Even terms that you think you understand may have a different meaning when applied to a home loan repayment plan.

Estimate Your Home Loan Repayment

With a better understanding of the key phrases and terminology used to describe a home loan, you should be equipped to compare home loan options. The next step is to calculate your potential home loan repayments to gain a more accurate idea of what you can afford.

The following home loan terminology should help you gain a better understanding of the various figures and values that you are presented with.

Lenders Mortgage Insurance (LMI)

Lenders mortgage insurance (LMI) is commonly required for borrowers that cannot make a significant deposit on a home. While LMI is common, nearly 25% of Australians do not understand who benefits from these payments. Many people assume that it protects the home buyer.

LMI is protection for the lender in case you cannot complete your home loan repayments. When the borrower defaults, the lender can recoup their loss through the insurance company.

Loan Valuation Ratio (LVR)

When applying for a loan, you may hear the term LVR. This refers to the loan valuation ratio. A high LVR may require you to pay LMI.

Typically, if the LVR is higher than 80%, the lender will require the borrower to pay lenders mortgage insurance to protect against the borrower no longer affording repayments. To increase the LVR, a borrower needs to raise additional funds.

Fixed and Variable Interest Rates

Borrowers need to choose between fixed and variable interest rates for their home loan. There are advantages and disadvantages to both options.

A fixed interest rate means that the interest rate is set and will not change during the fixed rate term. Typically, the fixed rate term lasts one to seven years, depending on the lender.

The variable interest rate is the most popular option in Australia. With the variable interest rate, the interest rate will change during the life of the loan based on the current state of the economy. When Australia’s economy is doing good, your interest rate will be lower. However, there is a risk that you may experience higher interest rates if the economy should shift in the opposite direction.

Comparison Rates

You may also find a comparison rate when looking at interest rates. In Australia, the National Consumer Credit Protection Act 2009 established the National Credit Code (NCC). The NCC requires that lenders include a comparison rate when advertising a fixed term loan.

Before this requirement was made, lenders could merely advertise the proposed interest rate. The comparison rate includes the interest rate plus most of the fees and charges. This provides a more realistic look at the interest rate that you will end up paying.

Estimate Your Home Loan Repayment

With a better understanding of the key phrases and terminology used to describe a home loan, you should be equipped to compare home loan options. The next step is to calculate your potential home loan repayments to gain a more accurate idea of what you can afford.

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