Considering the conflicting information coming through the media about mortgage brokers recently, we thought we would do our best to prove that mortgages don’t have to be mystifying and that by understanding a few key terms you can be knowledgeable of your requirements and confident in your understanding when speaking to a mortgage broker.
Loans and Products
Each type of loan has several specific features that makes it suitable for different financial structures, so it is important that you understand the different options:-
Variable rate mortgages
Variable loans are among the most popular loan type in Australia due to their extra account features and repayment flexibility. Variable home loan interest rates increase and decrease in accordance with fluctuations in the rates set by the Reserve Bank of Australia (RBA).
Fixed rate mortgages
With a fixed rate loan, the payments will be the same each week, fortnight or month. The agreed interest rate is fixed for a set period of the loan. This is usually one, three or five years. Breaking this contract with the lender could incur large fees. There is no offset account against a fixed loan.
Split home loan (fixed and variable)
You could also decide that you would like to split the loan and have some fixed and the rest variable. You can decide on the proportions of the split. If the interest rates changes, only the variable split will be adjusted.
Line of credit
A line of credit is a maximum limit that the bank will permit you to maintain. You can draw down on the line of credit at any time, providing you do not exceed the maximum set in the agreement. The advantage of a line of credit is that when you draw out a portion of the credit, you only pay interest on the drawn amount. This is popular for investors looking to access equity from one property to put towards a deposit or purchasing costs of another property.
These are loans specifically designed for those buying within their SMSFs. They are usually at a higher interest rate and attract higher setup costs.
Basic Mortgage Glossary
A glossary of terms to assist you in the loan process.
The amount of money you borrow from the lender when you take out a loan.
The fee the lender charges you for the use of their money.
Loan to value ratio (LVR)
The relationship between the loan amount borrowed and the value of the property. Typically, a lender will want you to contribute a 20% deposit and they will provide 80% of the value to complete purchase. If you have less than 20% they usually require that you take out lender’s mortgage insurance (LMI).
Lender’s mortgage insurance (LMI)
A one-off insurance payment which protects your mortgage lender against your default.
A transaction account that can be linked to your home or investment loan. The credit balance of your transaction account is offset daily against your outstanding loan balance, reducing the interest payable on that loan
If you have a variable-rate loan and you make extra repayments, you can withdraw that additional money. These are common on home loans. However, an offset account can provide the same financial benefit with more flexibility.
This is generally available to first home buyers and allows a family member to offer their property as additional security to your loan. If your family member already has a mortgage against their property, your lender may take a second mortgage.