Monday 14 March 2016
Article by Kelly Emmerton
Autumn is a popular home buying season, and this year, you might be getting ready to take the plunge and set yourself up in the home of your dreams.
If you’ve been to every open house within a 200km radius, sat down and worked out what kind of repayments you can afford, and most importantly of all, made the final decision between a sprawling two storey colonial and a homey, cosy cottage, then the next step is understanding what you’re dealing with when it comes to taking out a home loan.
Which is not always easy. A lot of jargon-y, technical terms get batted around during the home loan process, and for first home buyers, or even seasoned buyers who haven’t been in the market for a few years, it can be offputting and downright overwhelming.
Well, we’re here to help, by breaking down the top eight terms you should know before diving into the home loan rush this Autumn.
One of the very first steps in taking out a home loan should always be comparing what options are on the market, so you can be sure you’re getting the very best deal. But with so many lenders and so many things to factor into the decision - like interest rates, fees, features and lender credibility - it’s not always easy.
The comparison rate doesn’t cover all those things, but it does make comparing home loans a little easier by ensuring that you’re comparing all home loans on the same scale. It takes into account both the interest rate on offer and any fees or charges you’ll definitely pay to give you a more accurate idea of the true cost of a loan.
Keep in mind, though, that the advertised comparison rate is a guide, based on a set scenario of loan amount and term, which means if you are borrowing a different amount, your comparison rate will be different.
Read more: Comparison rate
On your search for the best home loan available, you may notice ‘offset account’ listed under features or benefits of some loans. But what is it? An offset account works pretty much just like a normal bank account - you can choose to have your salary deposited into it and you’ll have a debit card to access the money whenever you need to. But by having this money in your offset account you pay less interest on your home loan.
It works like this: if your loan amount is $500,000 and you have $20,000 sitting in an offset account, then you’ll only pay interest on $480,000 of your loan. All in all, a pretty painless way to minimise the cost of your home loan.
Read more: Offset account explained
LVR stands for Loan to Value Ratio, which basically asks how much of the value of your new home you’ve saved up, and how much you’ll need to borrow. For example, say you picked out a cosy cottage for $400,000 and had $40,000 saved for a deposit. You’ll be borrowing $360,000 - which is 90% of the property’s value, giving you an LVR of 90%.
Generally speaking, a lower LVR will get you better rates on a home loan, plus, you’ll avoid having to pay lenders mortgage insurance, which is the next need-to-know term on our list.
Read more: Loan to value ratio: What is LVR?
If your LVR is over 80%, most home loan lenders will require you to pay for lenders mortgage insurance. Lenders mortgage insurance ensures that if you can’t make your monthly repayments, the lender isn’t left out of pocket.
Having to pay for this insurance can add a substantial amount to the cost of your home loan, so before you take the plunge on a low deposit home loan, consider whether you’re able to save up for a larger deposit, or if you can have someone you trust act as guarantor.
Read more: Lenders mortgage insurance explained
Pre-approval is more or less an indication from your lender as to how much you’ll likely be able to borrow. When you have pre-approval, you’ll know what your budget is, and you’ll be able to start seriously looking at properties within it and making offers.
Once you have made an offer on the home of your dreams, your lender will assess the property. If they are satisfied that you haven’t overpaid, and that you’re still in a financial position to repay the loan, you’ll get final approval, and will be well on your way to living the dream.
But remember, pre-approval is usually conditional, so the lender doesn’t have any obligation to follow through and give you the loan after the pre-approval stage.
Read more: Home loan pre-approval
Hate to haggle? If you’re a first home buyer or if you’re still a little unsure of the process, you might feel better with the support of a professional behind you. That’s where a home loan negotiator comes in.
A home loan negotiator can work as a middleman between you and a lender to help you get the most competitive deal possible. Not only can they find you the best priced home loan, but they can also talk through some of the home loan features that might be important for you.
Interested? Why not get in touch with Mozo’s resident home loan negotiator, Steve Jovcevski and see what he can do for your home loan situation.
Don’t get too ahead of yourself at this point. You may have found the house of your dreams, but the next step is to wade through the legalities of transferring ownership from one person to another - known as conveyancing.
This process includes drawing up contracts, paying the deposit, transferring the title and paying stamp duty, plus it gives the buyer the chance to identify any defects that might affect the final price of the property.
After you’ve received final approval for your home loan, conducted conveyancing and agreed on the final price of your new home, your lender will meet with the seller’s representatives and make the final payment to the seller on your behalf.
This is known as settlement - the deal is done, and you’ll have the keys to your brand new home in hand. All you have to do then is keep up with your monthly repayments, and the property will be yours in no time at all.
Read more: Sealing the home loan deal
Now that you know the home loan lingo, head over to our home loan comparison tables to find the most competitive deal available to you.Home loan tips