Understanding how home loans work in Australia and trying to navigate all the terminology can be tough, but for first home buyers it can be overwhelming.
The good news is that once you understand some key terms, you are well on your way to cutting through the jargon and understanding which home loan might be best for you.
Stamp Duty or Transfer Duty
This is simply a State government tax on property purchases. Duty is a large up-front cost, normally in the tens of thousands of dollars. How much you pay depends on which State your property is in and the cost of the property. There are Duty calculators available for every state to work out exactly what you might be up for. However, if you’re a first home buyer, most States offer concessions or waive the need to pay this to make life a little easier.
The NSW Government is currently discussing removing this tax and swapping it for an ongoing yearly tax, but this has not been legislated at the time of writing. Other States will look to this potential change, so it’s worth paying attention to this news when you hear it.
Loan to value ratio (LVR)
The LVR is the percentage of the loan divided by the market price for the property. For example:
$${$400,000\ loan \over $500,000\ market\ price\ for\ home}=80\%\ LVR$$
This figure caps the amount a lender will give to you as a home loan. Lenders prefer to give loans at an LVR of 80% but will stretch to 90% for first home buyers. The maximum LVR we have seen in the market is a 95% LVR.
Please note that loans with an LVR greater than 80% will likely require Lender’s Mortgage Insurance (LMI).
Lender’s Mortgage Insurance (LMI)
LMI is a one-off insurance premium, paid by you, on behalf of the lender. It protects the lender if the borrower fails to repay their loan. If you haven’t saved up a 20% deposit plus settlement costs, and your LVR is over 80%, you will likely be charged this fee. As a rough estimate, this could cost you over $13K on a $500K loan, if you only have a 10% deposit saved up.
Variable-rate loan
This is the most common type of home loan in Australia and means that your interest rate will fluctuate over the life of your mortgage depending on the current rate of interest offered by your mortgage provider.
Fixed-rate loan
A fixed rate means your interest rates are set for a term like two or five years, no matter how much the market changes. These rates are generally fixed for two to five years and then they revert to a variable rate for the rest of the life of your mortgage. You do need to check how the variable rate will be calculated once the fixed term comes to an end.
Offset Account
An offset account is a bank account that’s linked to your home loan. The money sitting in this account doesn’t earn interest but instead will offset the money in the account from your home loan balance.
E.g., If you have $20,000 in your offset account, and a loan of $400,000, then the interest for that month will be calculated as:
$$({$400,000-$20,000})\times your\ interest\ rate$$
Many people get their main transactional account to be their Offset Account. So, when they are paid, their wage offsets the balance of the mortgage until they spend it. Saving them interest and helping to repay their loan quicker.
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