Cutting throught the jargon: Home Loans
Home loans – for many of us they’re the gateway to realising the great Australian dream. A necessary evil of sorts because who has a million dollars stashed away under their mattress to buy a house?
So many of us have a mortgage. It could be just a basic, standard loan or you could have loaded up on all the bells and whistles. So, do you know your home loan jargon? We’ll give you the lowdown right here.
INTEREST RATE
The interest rate is used to calculate how much interest you need to pay on your loan. It’s one of the costs of borrowing money. Your rate can be fixed or variable and you can even split your mortgage into parts so that one part is paying a fixed rate and the other a variable rate.
Research commissioned by UBank has revealed that only 16 per cent of Australians know the interest rate they pay on their home loan! Knowing the rate you’re paying on your mortgage arms you with valuable information that you can use to get yourself a better deal and save on interest charges. Do you know your rate?
LVR
You’ve probably come across a fair few acronyms in your life; LOL, FOMO, FBI. Have you come across LVR? When it comes to home loans, LVR is the loan to value ratio. It’s your loan amount divided by the value of the property you’re looking to buy. If you have a loan of $700,000 and the value of your property is $1,000,000, your LVR is 70%.
LVR is a measure of risk. The higher the percentage, the riskier a lender will consider your loan. This is why many lenders require you to pay Lenders Mortgage Insurance (LMI) if your LVR is over 80%. Many lenders also cap the amount they will lend to you based on the LVR, for example, banks may not lend above a 97% LVR.
OFFSET ACCOUNT
An offset account is a bank account that is linked to your mortgage. Now, why would anyone want to do that? Well, the balance in your offset account is deducted from your loan balance before interest is calculated. The benefit of an offset account is that you are effectively using your own savings to reduce the interest you pay on your loan which helps you repay the loan faster.
There are two types of offset accounts:
- 100% offset – the entire balance of your offset account is deducted from your loan balance before interest is calculated; or
- Partial offset – a portion of your loan equal to the balance of your offset account is charged a reduced interest rate.
REDRAW
A redraw facility allows you to access any funds you have paid in extra repayments to your loan. It’s generally less flexible than an offset account because your lender may charge you a fee to withdraw those funds and there could be minimum and maximum limits on the amount you can redraw each time.
Using a redraw facility is more suitable if you have some money to put towards your mortgage that you don’t plan on using in the immediate future.
Want to learn more about home loans? You might like to read our article: What you need to know about home loans.