|Comparison Rate||All lenders are required by law to include a comparison rate when advertising a loan interest rate. Essentially, it provides a way for borrowers to see the ‘true cost’ of a loan. It is a percentage figure calculated from the lenders’ current interest rate as well as all of the fees and charges (such as establishment fees or ongoing account keeping fees) involved in obtaining the loan. The rate is useful in comparing the overall cost of different loans, but may not assess other possible loan features that a borrower may desire. It is calculated on:
|Fixed Rate vs Variable Rate||A variable interest rate is one that will change periodically depending on the overall economy and the interest rates set by the Reserve Bank and how a specific lender chooses to charge interest to its clients. A fixed rate however is set at the commencement of the loan, for a defined time period (the fixed term) and will not fluctuate with other lending and economic conditions until that term is expired, even if interest rates decrease. Both types of interest rate have pros and cons, depending on the borrower’s situation.
Some lenders will also offer the opportunity to ‘split’ your loan, so that you have a fixed portion and a variable portion. Splitting your loan means that if rates rise, the fixed component of the mortgage will offer some protection against it. Conversely, if rates drop, then the variable component allows you to take advantage of lower repayments.
Your Smartline Rockingham mortgage broker will assist you with determining the best option for your situation.
|How is interest calculated?||Interest is calculated daily on how much you still owe on your loan amount. The amount still owed is multiplied by the interest rate and then divided by the number of days in the year, i.e. it is calculated daily. This amount is then multiplied by the number of days in the month, and charged to your loan account monthly. The more frequently that you make repayments (and if you can also repay more than the minimum repayment), the less interest you will pay over the life of your loan as the original amount borrowed is decreasing, therefore less interest is accruing,|
|LVR (Loan to Value Ratio)||The LVR is a term that lenders use to determine the level of risk they take when lending to a borrower. It refers to the amount being borrowed compared to the value of the property being purchased, expressed as a percentage.
Ideally, borrowers would have a low LVR by having saved 20% or more of the property value as a deposit. In this case, you would most likely not be required to pay LMI.
If the LVR is over 80% (ie you need to borrow more than 80% of the property sale price), you will be required to pay Lenders Mortgage Insurance (LMI) as the lender would deem you to be a higher risk borrower.
|LMI (Lenders Mortgage Insurance)||Lenders mortgage insurance is charged to borrowers that do not have the 20% deposit required by most lenders offering home loans. This allows you to borrow more than 80% of the purchase price. Some lenders will allow you to borrow up to 95% of the purchase price with the payment of an LMI premium. It protects the lender if the borrower defaults (ie, can no longer meet the mortgage repayments). Although the lender has the property as security for the loan, if property values decline there may not be sufficient income from the sale to cover the loan. This is where LMI covers the lender. LMI is only paid once when the loan is established and can be paid up front or capitalised into the loan, which means it becomes part of your mortgage and is paid off over the loan term.|
|Mortgage Protection Insurance||Mortgage Protection Insurance covers you in the event that you are unable to meet your mortgage repayments in the event of death, sickness, unemployment and disability. This insurance is paid annually and can vary depending on the outstanding balance of the loan. Your Smartline Rockingham mortgage broker can assist you with arranging MPI if this is something that you require.|
|Refinancing||If you have had a home loan for a few years, your financial situation and needs may have changed since you first obtained the loan. You may wish to now have a loan that has more flexible or better options than your current loan. Refinancing is the process of obtaining a new loan (which better suits your needs) to pay out your old one.
You may wish to refinance for a number of reasons, for example:
It is important to remember that when looking at changing home loans, there may be associated upfront and/or ongoing costs associated with changing from one to another. Your Smartline Rockingham mortgage broker can assist you with determining which fees may apply in your circumstances and whether refinancing is a suitable option for you.
|Settlement||Settlement is the process by which the sale and purchase of property is finalised. It involves the exchange of documents and funds to complete the transaction between the buyer, the seller, and the lending institutions that each uses (the buyer’s lender must pay the funds to the seller’s lender to discharge the mortgage held by the seller). It also includes completing the transfer of land documents for the Land Titles Office and adjusting other charges such as land and water rates that apply to the property.
Smartline Rockingham mortgage brokers will liaise with the settlement agent on your behalf throughout the whole process.
|Principal & Interest Loan||Each repayment on a principal & interest (P&I) loan consists of two parts. One part is used to start paying off the principal (the original sum borrowed). This is based on spreading the original loan amount over the set loan term thereby decreasing the amount owed each month. The other repayment portion is used to pay off the interest that has accrued in that period. As more of the principal is paid off, the amount of interest that is charged decreases as the amount owing is less.|
|Interest Only Loan||With this type of loan, the borrower only repays the interest charged on the loan, rather than both principal and interest. The loan repayments will be lower than with a P&I loan however the outstanding loan amount remains the same. Interest only (IO) loans are very popular with investors as it minimises repayments in the short term, based on the property generally increasing in value over the long-term and building equity. They are usually only available for a limited time, about 3-5 years before the loan reverts to a P&I loan.|
|Loan Term||This is simply the time period over which the loan is taken and promised to repay, usually 25 or 30 years in the case of home loans.|
|Equity||Equity is the difference between the value of the property (imagine what you would get if you sold it today) and what is still owed to the lender. Equity is built as the principal is paid off, by property growth over time and by also adding value, for example, renovating the kitchen or adding a second story (Note: be wary of over-capitalising).|
|Over-capitalising||When the cost of renovations is greater than the value it adds to a property, therefore those costs will not be recouped if the property is sold.|
|Line of Credit||Also known as an equity line an LOC is a pre-approved limit of borrowings that you can use in smaller amounts or as a whole amount. Interest accrues on the balance that you use, not the overall limit. It can be useful if you have built up equity in your home, as you can access the equity to fund other items, such as a car or as a deposit on an investment property.
Your Smartline Rockingham mortgage broker can assist you in establishing an LOC as part of your overall home loan application.
|Offset Account||An offset account is a general transaction account that is linked to an eligible home loan. Any money that is in this account is offset against the amount still owing on the loan. This means that the overall amount owing is lower, therefore reducing interest charges while the money is in the account.
These accounts are a valuable tool that can assist in saving interest and therefore paying off your loan sooner. Your Smartline Rockingham mortgage broker can assist with finding a suitable loan for your needs if you require an offset facility.
|Redraw Facility||If your home loan has a redraw facility and you are making extra repayments, you are able to redraw those funds if or when needed, i.e. to borrow it again even though you’ve repaid it. Many lenders now offer this feature and your Smartline Rockingham mortgage broker can determine the loans with this facility that best suits your needs.|
|Stamp Duty||Stamp duty, also known as transfer duty, is charged by the each state government through the Office of State Revenue on “dutiable property”.
In WA, dutiable property is defined as:
“Transfer duty may be described as a general revenue tax, which is imposed under the Duties Act 2008…on various dutiable transactions (whether documented or not) including transfers of real estate and certain business assets” (WA Dept. of Finance, Office of State Revenue)
|Guarantor||If a person is unable to obtain a loan in their own right due to their own financial situation, a lender may suggest a guarantor. A Guarantor is a person, such as a family member, that signs a guarantee for someone. This guarantee is essentially saying that “if this person cannot or will not meet their own loan repayments, I accept that I will be legally responsible for repaying the whole debt as well as any fees, charges or interest.” However, a guarantor does not have any right to the property bought with the loan, even if they end up being the one to pay it off. This is different to being a co-borrower.
Always think very carefully before acting as a guarantor for someone else’s loan, as it could impact your own financial security and credit history. In extreme cases, you may also be listed as bankrupt by the credit provider. You may even have to sell assets that weren’t offered as security for the loan to repay the outstanding debt.
Your Smartline Rockingham mortgage broker is available to fully discuss and explain the implications for both parties with these situations.
|Co-borrower||A co-borrower signs a loan with someone else. Both parties are then jointly and separately liable for repaying the full amount owing.|