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With the first home buyer friendly provisions announced in the federal budget and the First Home Owner Grants and concessions offered by several Australian states, there seems no better time than now for the first home buyers to jump into the foray and become proud owners of their coveted dream. However, as a newbie property buyer, you may find yourself lost in the sea of real estate jargon that you are expected to master the moment you dream of owning a house!

 

 

If you feel befuddled with the alien terminology floating all around as you start on the journey to purchase your first home, you have landed at the right place. In the next few lines, we will decode a few important mortgage terms every first home buyer must know. Let’s get busting:


Comparison Rate
– Everyone knows that interest rate refers to the rate of interest charged by a lending institution as the cost of lending money to you. Most people are also aware of the two types of interest rates: Fixed and Variable (learn more here). But do you know that it is not the interest rate but the comparison rate that reveals the true cost of a home loan?

All lenders are required to display the comparison rate next to their advertised interest rates. This comparison rate is calculated by taking into account the interest rate on the home loan as well as some of the fees and charges to give a more accurate representation of the cost of the loan.

Expressed as a percentage, the comparison rate is based on the amount of the loan, its term, interest rate, repayment frequency and other fees and charges. To get a fair idea of the comparison rate that applies to your home loan, we suggest you look at the comparison rate for the amount and term closest to your home loan.


Lender’s Mortgage Insurance (LMI)
– LMI, in simple terms, refers to the insurance taken out by a lender to protect itself against a borrower defaulting on a home loan. While LMI protects the lender (and not you) against any defaults in repayment by the borrower, the cost of the insurance, which can run into several thousands, is borne by you, the borrower. As a thumb rule, most lenders require LMI if you are borrowing more than 80% of the property’s cost.

Generally speaking, LMI is an additional cost that can be avoided by saving a 20% home loan deposit. However, if you are struggling with your home loan deposit, LMI could be a small cost for purchasing your home sooner. Read more here.


Offset Account
– In real estate parlance, an offset account is just like a regular savings account that is linked to your home loan. The advantage lies in the fact that the money held in this account is offset against your outstanding home loan, meaning you are charged interest only on the remaining amount.

For example, if you have an outstanding home loan of $250,000 with $50,000 saved in your offset account, you would only be charged interest on the remaining $200,000. Note that the balance in an offset account does not earn interest.

An offset account does not change the amount of your repayment, but the portion applied towards the principal amount increases, reducing your debt rapidly. Learn how you could save more with an offset account here.


Debt-to-Income Ratio
– When it comes to home loan approval, your debt-to-income ratio plays a substantial part in deciding the fate of your home loan application. Debt-to-income ratio identifies how much of your monthly income is applied towards paying off recurring debts such as credit card payment, personal debt, mortgage repayments or car loan, giving an estimate of your disposable income each month.

More often than not, banks limit lending to no more than 40-45% of total monthly income. Thus, if you are planning to buy a home soon, a high debt-to-income ratio will not only impact your finances adversely but also your mortgage approval. Read on for some tips to improve your debt-to-income ratio.

As a first home buyer, it is important to educate yourself before you jump onto the property bandwagon. Understanding basic real estate terms will help you chart the mortgage market with much more confidence. Apart from brushing up your knowledge from the ample online resources, use online calculators to crunch the numbers and always compare home loan rates to get the best deals in the market. If you have any home loan query, don’t hesitate to get in touch with our expert mortgage brokers for a quick hassle-free resolution, absolutely free of cost.

 

By Vidhu Bajaj
HashChing Content Writer

 

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