Home Loans Explained
]Every industry has their own unique jargon and it can be confusing, even frustrating when people in service roles use jargon to you like you’ve been working in their industry for years.
Most of the time you’re not really interested in knowing the technical aspects of their service, you just want to know if it’s going to provide a solution to your problem or achieve another desired outcome.
The Home Loans industry uses plenty of jargon and acronyms. LMI, LVR, DSR, LBRA, End Debt, Peak Debt, Serviceability, Funds to Complete, Supporting Docs, Lo Doc, Full Doc, Alt Doc, and so on…
Luckily you don’t have to know the meaning of all of these terms and acronyms. The most important terms you need to familiarise yourself with if you’re thinking about buying your first home are…
LVR – Loan to Value Ratio (Loan of $450,000 divided by property value of $500,000 = 90% LVR) This simple little equation determines whether you’ll pay mortgage insurance or not. If we use the example above of the loan with a 90% LVR then that is a situation where mortgage insurance will be necessary. To avoid paying mortgage insurance you need to have an LVR of 80% or lower.
I find the best way to put it into perspective for my own clients is to turn it around and base the calculation on their deposit. My clients have been busy saving a deposit before they approach me so this term is more relevant to them. If you have a 10% deposit you’re LVR is 90%. If you’ve saved a 20% deposit then you’ve done well and the LVR for your loan will be 80%, and you’ll avoid paying mortgage insurance. You might get a better rate too!
LMI – Lenders Mortgage Insurance. You know when you’ve taken out an insurance policy for your car or home there’s a premium to pay each year. Mortgage insurance is required when you have less than a 20% deposit to put down after stamp duty and purchasing costs. This premium is only payable once but is not transferable if you move house.
This insurance policy is held by the bank against your loan to protect themselves but the premium is paid by you. The premium is calculated based on what your LVR will be and the amount of the loan. If you want to view some potential charges for LMI premiums then the Genworth website is a good place to visit. They have a calculator that will give you figures based on different loan amounts and different deposit amounts.
Servicing – The means from which you are able to meet your loan repayment obligations based on your income and living expenses. When a lender lends you money they want to be able to see that you can repay the loan back comfortably. It’s also an ASIC requirement that finance providers and mortgage brokers make reasonable enquiries about a borrowers living expenses in order to establish that a potential loan will not cause financial hardship to the borrower.
Things like dependant children, other loans, and credit cards will impact your borrowing capacity. If you want to find out what your borrowing capacity is you can use our How Much Can I Borrow Calculator
If you’re unclear about anything to do with home loans then please contact a Reality Home Loans broker for some ‘Jargon Free’ advice. lending@realityhomeloans.com.au
