Home loans explained
10 home loan phrases you need to know
5 min read
Do some home loan phrases have you confused? Don’t worry! Tic:Toc explains 10 common home loan phrases to help you out when it comes to purchasing a home.
The home loan industry is full of complicated jargon that can more often than not end up confusing customers rather than helping them. Knowing the lingo can help you navigate the home loan process more easily, and know what to expect ahead of time. Here are 10 home loan phrases you need to know.
LMI (or Lenders’ Mortgage Insurance) is an insurance that your lender takes out (that you cover the cost of) when you get a home loan but have less than 20% deposit. LMI protects the lender in the case you can’t make your home loan repayments. A smaller deposit means your lender has less security against your loan and is taking on more risk by lending to you. Paying LMI allows you to get a home loan sooner with a smaller deposit instead of having to wait years to save up a bigger deposit.
LVR (Loan to Value Ratio) is basically your loan amount represented as a percentage of your property’s value. For example, if you want to buy a property worth $375,000 and take out a loan for $300,000 to buy it, your LVR is 80% (300,000 divided by 375,000 multiplied by 100). Essentially, your LVR is the percentage left over after your deposit, so if you have a 20% deposit, your LVR is 80% (20% + 80% = 100%).
Your LVR is used by lenders to calculate the level of risk on your loan. The lower the LVR, the lower the risk for your lender.
Serviceability refers to whether or not you are able to comfortably afford to make your home loan repayments. When determining whether your financial situation is serviceable lenders also need to account for potential rate rises. This ensures that even if your interest rate goes up a little, you’ll still be in a comfortable financial situation and be able to make your home loan repayments.
Equity is a name for the difference between your current home loan amount and the value of your property. So for example, if you currently owe $200,000 on your home loan and your property is valued at $350,000, that means you have $150,000 of equity in your home.
Your equity can increase as the value of your property increases, and as you pay down more of your loan. You can get a rough idea of how much equity you have by looking at similar properties for sale in the same area. But if you want a more exact number, you can get your property officially valued.
Conditional approval (sometimes known as pre-approval) means that you’ve been approved (conditionally) for a home loan. It is essentially an indication from the lender that they are interested in lending a certain amount of money to you – assuming your situation doesn’t change and certain conditions are met. It’s not an absolute guarantee that you’re getting a home loan, but it does help you get an idea of how much you can borrow and is a good indication to sellers that you’ll be able to get a home loan.
At Tic:Toc we offer a form of conditional approval that you can apply for if you’re serious about buying a home but haven’t found the right property yet.
Your liabilities are any debt or financial obligations you have. This includes things like home loans, personal loans, car loans, student loans, and credit card limits (even if your card is fully paid off).
Your liabilities are considered when calculating your borrowing power, and lenders also need to take them into account when assessing your home loan application. If you’re curious about what your borrowing power is you can use a borrowing calculator to get an estimate.
Conveyancing is the legal process of transferring the ownership of a property from one person to another (the paperwork side of things). It involves preparing, verifying, and lodging the paperwork involved when selling a home. Finding, completing, and lodging all of this paperwork can be confusing and time consuming, which is why you can get a licensed professional (a conveyancer) to help you.
An offset account is like a regular savings bank account that is attached to your home loan. Each day when your lender calculates the interest to charge on your home loan, the balance of your offset account is subtracted from your home loan’s principal amount, meaning you pay less interest on your loan. You’ll usually get a bank card with your offset account and be able to use it like an everyday transaction account.
Offset accounts are a great way to minimise the amount of interest you pay on your home loan, while still having access to your money if you need it.
Refinancing refers to the process of taking out a new home loan for a property you already own and paying off your old loan with the money from the new loan. There are many different reasons you might decide to refinance your home loan, some of which include:
If you’re thinking about refinancing, you can use a refinancing calculator to get an idea of how much you could save on your home loan repayments.
Settlement is the final step in the home loan process before you become the owner of your property. At this step the seller receives payment for the property and your home loan officially starts. And in the case of refinancing, the payment is received by your existing lender (instead of a seller). The settlement process involves a lot of waiting and is usually quite boring, but it is a super important part of the process – and it marks the start of your home ownership!
Buying a home (or refinancing one) can be very stressful. Add in the complicated jargon that lenders and other people in the industry use and it becomes downright overwhelming. So, now you know these 10 common home loan phrases, we hope you’re feeling a little more confident in navigating the home loan process.
If you have any questions at all, or if we’ve missed a phrase that you’re still not sure about, have a chat with one of our home loan specialists who will gladly answer any questions you have.