Confusing Home Loan Terms – What does it all mean?
Australia is a nation of home owners. According to the latest ABS figures, two out of every three Australian households are owner-occupied. Of these, more than half are paying off a mortgage.
What Does It All Mean
Confusing Home Loan Terms – Even though millions of Australians have a mortgage, many of them find even some of the more basic mortgage terms confusing. It’s not just important to understand these terms when it comes to securing a home loan, you also need to know them so you can ensure you’re getting the best deal possible.
As part of series of in which we cut through confusing financial jargon, we break down some of the terms that are important to know when it comes to looking for a home loans. These are just a few of the essential terms confused or misunderstood by aspiring home owners.
LVR stands for Loan-to-Value Ratio. It is one of if not the most common acronyms you will come across when you search for a mortgage. LVR is the value of the loan over the value of the property. For example, if the value of the loan is $400,000 and the value of the property is $500,000, the LVR is 80%. LVR is one of the methods lenders use to determine a loan’s risk, and whether it’s likely to be approved or not. For example, a loan that has a LVR of 80% carries a greater risk than one that has a LVR of 60%. In cases where the LVR is in excess of 80%, the lender may adjust the interest rate.
LMI stands for Lenders Mortgage Insurance. LMI covers a lender in case one of its borrowers defaults on their mortgage. With many but not all lenders, LMI is compulsory for borrowers who do not match or exceed a specific LVR rate. For example, if a borrower does not meet the 80% or over LVR specified by their lender, they must pay for LMI. Depending on the terms of the loan, this may come in the form of a one-off payment or it may be added to the borrower’s loan repayments.
RBA Cash Rate
You may have heard your mortgage broker casually mention the RBA Cash Rate and how it may impact your interest rate. The RBA (Reserve Bank of Australia) is Australia’s central bank and the Cash Rate is something that the RBA uses to influence economic activity in the country. However, while the Cash Rate can be an important factor in determining your loan interest rates, it is just one of a number of factors that will determine the actual interest rate a lender sets for your loan.
A redraw facility can permit you to withdraw any extra repayments you made into your mortgage, usually for a fee and on the assumption that your account is in order. For example, if your monthly repayment is $2000 and you instead pay in $2500 a month for 12 months, you will have a pool of $6,000 that you can access if you need extra cash for something. It’s important to note that a redraw facility is at the lender’s discretion. It is usual that to access a redraw facility, a borrower must be ahead on their loan repayments. It is also usual that the borrower must withdraw a specified minimum, which may be in the thousands.
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Australian Bureau Statistics
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