From credit scores to LVRs, find out what the home loan jargon means and how it help you snag the right home loan deal.
When it comes to home loans, it can sometimes feel like lenders and mortgage brokers speak a different language. We give you the rundown of commonly used terms, and how you can leverage your understanding to find the best loan product and lender.
Credit history
Each lender you apply with will check your Credit History by looking at your personal credit file. Keep on top of your bills and debts so you don’t fall into arrears. Credit agencies can hold details of your past debts on file for up to seven years, so it helps to be proactive from the outset.
When searching for a home loan, do your research first before submitting applications, as numerous loan applications can be a red flag to a lender.
You can get a copy of your personal credit file from Veda. A good mortgage broker or lender will also advise you on ways to clean up your credit history to make you a more attractive home loan customer.
Equity
Equity is essentially the difference between the market value of your property and the loan you have against it. So if your property is worth $650,000 and you have a $200,000 loan outstanding, you have $450,000 in equity.
You can use your available equity to renovate, invest or buy new assets so it’s a great way to help grow your property portfolio.
Fixed, variable and split interest
Interest is an amount you pay to the bank on top of the original loan amount over the loan term. Interest can be fixed or variable, or both, or you can take out an interest-only loan, which is an attractive prospect for investors. These different types of interest have their own rates. Keeping an eye on interest and comparison rates is a good way to educate yourself about the types of loans available. But remember, interest isn’t the only factor to consider – loan amount, term, borrowing type and benefits like reduced administrative fees, offset and redraw facilities should all play a part in your final home loan decision.
LMI
Lenders mortgage insurance (LMI) is an additional payment required from the borrower to help protect the lender against the risk of taking out a large mortgage. Generally, you can borrow up to 80 per cent of the value of a property without having to pay LMI.
To avoid paying LMI, make sure you have a decent deposit (at least 20 per cent) to reduce the amount you’ll need to borrow and any additional costs.
LVR
LVR stands for loan-to-valuation ratio. It is essentially a formula that lenders use to determine the riskiness of the loan and whether you’ll need to pay LMI.
It works by dividing the amount of the loan by the value of the property. For example, a property with a loan of $250,000 that is worth $400,000 will not require LMI because the borrowing is only 62.5 per cent of the property’s value.
With an understanding of these commonly used loan terms, you can put yourself in the best financial position to find a home loan that is right for you. At Beyond Bank, we can help you understand these terms to find the home of your dreams.
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