Home loan jargon

Home Loan Jargon Explained

We understand that there is a huge amount of information to process when you are researching the property market and home loans. If you are not sure about all of the lending jargon that’s out there and hope to find some clear definitions to make that first investment less difficult, then read on.

Interest Rate

An interest rate is the rate of interest that a bank or other financial institution (the lender) sets on the cost of lending you money. The interest rate usually trends in the same direction as the Reserve Bank of Australia’s official cash rate (though not always). There are two main types of interest rates to be aware of: variable and fixed. A variable interest rate is one that can move up or down at any time and again is usually set in conjunction with the RBA’s rates. A fixed interest rate on the other hand, is one that will remain the same over an agreed upon period of time. Unlike a variable interest rate loan, where minimum repayments vary according to the interest rate, the repayments for a fixed interest loan will always stay the same over the agreed period.

Offset Account

An offset account is used as a means of reducing interest costs on a loan. This is done by linking the mortgage account to the customer’s deposit or transaction account. Any balance in this linked account offsets the loan principal on your mortgage and means that subsequent interest payments will be less. For example, if your mortgage is $300,000 and you have an offset account with $15,000 in it, then you are only charged interest on the first $285,000 of the mortgage, rather than on the full amount.

Comparison Rate

In order for consumers to be able to have a chance to identify the true cost of a loan, a comparison rate is often used by lenders. This rate includes the interest rate itself plus any fees and charges relating to the loan. These figures are combined into a single percentage that is based on the term of the loan, the repayment frequency, any fees and charges and the actual standard interest rate.

Lender’s Mortgage Insurance

Lender’s Mortgage Insurance (commonly known as LMI) is the insurance that a lender takes out on a loan to protect itself in case the borrower defaults on a mortgage. LMI is generally a necessity for loans that are for 80 per cent of a property’s value or higher. Note: LMI is a cost that you will have to pay, but it protects your lender for default – not you. To avoid paying LMI, save up a deposit of more than 20 per cent of the total cost of the home.
For further questions, feel free to get in touch with one of our home loan specialists on 02 8437 4766 or via admin@yourmortgage.com.au.

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