Buying your first home involves learning a lot of new terms, and it can feel like you’re trying to decode a foreign language. Don’t worry, we’ve got you covered!

In this post, we’ll break down some of the most common bank jargon you’ll encounter, so you can feel more confident and informed during your home-buying journey.

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1. Loan-to-Value Ratio (LVR):

• What It Means: The LVR is the amount you’re borrowing compared to the value of the property. It’s expressed as a percentage.
• Why It Matters: A lower LVR usually means less risk for the lender, and it can help you avoid Lenders Mortgage Insurance (LMI).

Example: If you’re buying a house worth $500,000 and you have a $100,000 deposit, you’re borrowing $400,000. Your LVR is 80% ($400,000 / $500,000).

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2. Lenders Mortgage Insurance (LMI):

• What It Means: LMI is a type of insurance that protects the lender if you can’t repay your loan. It’s usually required if your LVR is above 80%.
• Why It Matters: LMI can add a significant cost to your loan. However, some government schemes and parental guarantees can help you avoid paying it.

Example: If your LVR is 90%, you might need to pay LMI, which could be thousands of dollars added to your loan cost.

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3. Offset Account:

• What It Means: An offset account is a transaction account linked to your home loan. The money in this account reduces the amount of interest you pay on your loan.
• Why It Matters: It’s a great way to save on interest and pay off your loan faster while still having access to your money. However, offset accounts often come with additional fees.

Example: If you have a $300,000 loan and $20,000 in your offset account, you only pay interest on $280,000.

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4. Redraw Facility:

• What It Means: A redraw facility allows you to access extra repayments you’ve made on your home loan.
• Why It Matters: It gives you flexibility to use your extra repayments if you need the money for something else.

Example: If you’ve paid an extra $10,000 into your loan, you can withdraw this amount later if needed.

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5. Fixed Rate Loan:

• What It Means: A fixed rate loan has an interest rate that stays the same for a set period, usually 1 to 5 years.
• Why It Matters: It offers stability and predictability in your repayments, which can help with budgeting.

Example: If you have a fixed rate of 3% for 3 years, your repayments won’t change during this period, even if interest rates go up.

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6. Variable Rate Loan:

• What It Means: A variable rate loan has an interest rate that can change over time, usually in line with market rates.
• Why It Matters: Your repayments can go up or down, which means you need to be prepared for changes.

Example: If your variable rate is 3% and the market rates go up, your rate might increase to 3.5%, making your repayments higher.

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7. Comparison Rate:

• What It Means: The comparison rate includes the interest rate plus most fees and charges, giving you a better idea of the true cost of the loan.
• Why It Matters: It helps you compare different loans more accurately.

Example: A loan might have a 3% interest rate but a 3.5% comparison rate, which includes additional costs.

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8. Principal and Interest (P&I):

• What It Means: This is the most common type of home loan repayment where you pay off both the loan amount (principal) and the interest.
• Why It Matters: Paying down the principal reduces your loan balance over time, while interest is the cost of borrowing the money.

Example: If your monthly repayment is $2,000, part of it goes towards paying off the principal, and part goes towards interest.

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9. Interest-Only Loan:

• What It Means: For a set period, you only pay the interest on the loan, not the principal.
• Why It Matters: Your repayments will be lower during the interest-only period, but you won’t be reducing the loan amount.

Example: If your interest-only period is 5 years, you only pay the interest each month, not the loan amount itself.

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10. Application Fees:

• What It Means: These fees cover the cost of the documentation and admin services associated with setting up your new mortgage. They are a one-off payment, usually under $1,000.
• Why It Matters: It's an upfront cost you need to budget for when applying for a home loan.

11. Valuation Fees:

• What It Means: These fees cover the cost of valuing the property you’re purchasing to ensure it’s worth the amount you're borrowing plus your deposit. Some lenders offer this service free of charge.
• Why It Matters: It ensures the property is worth the purchase price and helps protect the lender's investment.

12. Stamp Duty:

• What It Means: Stamp duty is a state government tax charged for some transactions, including buying a new home. The cost varies depending on whether you're a first home buyer, the state you're in, and the property's value.
• Why It Matters: It's a significant cost, so use stamp duty calculators to estimate how much you need to pay.

13. Conveyancing Fees:

• What It Means: When a property is sold, its title must be transferred from the seller to the buyer, known as conveyancing. This is usually handled by an accredited professional who charges a fee.
• Why It Matters: These fees can run into the thousands and are necessary to ensure the legal transfer of property ownership.

14. Legal Fees:

• What It Means: Legal fees cover the cost of having a lawyer draw up the contract for your home loan and handle other legal services.
• Why It Matters: They ensure all legal aspects of your property purchase are handled correctly.

15. Service Fees:

• What It Means: Monthly service fees are charged by the lender to cover the administration of your loan.
• Why It Matters: It's an ongoing cost that you'll need to factor into your budget.

16. Annual Fees:

• What It Means: These are charged on package home loans, which often come with promotional discounts or lower interest rates. Sometimes they are initially waived.
• Why It Matters: It's an annual cost that can add up over time, so be sure to consider it when choosing a loan.

Understanding these common terms and fees can make the home-buying process less intimidating and help you make better financial decisions. Keep this guide handy as you navigate your journey to owning your first home!

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Feeling confused by bank jargon?

Feel free to reach out and we can explain everything you need to know!

jane@justrightlending.com.au

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