Learn common first home buyer loan terms like LVR, equity, and offset accounts to navigate your home buying journey with confidence.
Conditional Approval
Conditional loan approval is granted by a lender when they are satisfied with the borrower's application but require additional information or steps before giving full approval. For instance, the borrower may need to provide evidence of insurance or other supporting documents. Meeting these conditions is essential for the loan to move to unconditional approval status.
Conveyancing
Conveyancing is the legal process involved in transferring property ownership from the seller to the buyer. This process is generally handled by a licensed conveyancer or solicitor who ensures that all legal requirements are met. If you’re looking for a trusted professional to assist with conveyancing, we would be happy to recommend one from our network.
Deposit
The deposit refers to the upfront payment a buyer makes toward the purchase of a property. It is typically expressed as a percentage of the purchase price.
Traditional deposits are around 20% of the property’s value.
Some first-home buyer schemes allow for a deposit as low as 2% to 5%.
This deposit reduces the overall loan amount, and having a larger deposit can improve your borrowing capacity and interest rates.
Equity
Equity represents the difference between the market value of your property and the outstanding balance of your loan. For example, if your home is worth $500,000 and you owe $300,000 on your loan, your equity in the home is $200,000.
Equity can be leveraged for:
Cash-out refinancing – accessing some of the equity for other financial needs.
Using equity as security – borrowing against the value of your property to purchase an investment or additional property.
Interest
Interest on a home loan is calculated daily based on your loan balance and interest rate. At the end of the month, the lender adds up the daily interest charges, and this becomes the monthly interest amount. Because interest is calculated daily, paying off your loan more frequently (such as weekly or fortnightly) can reduce the total interest you pay over the life of the loan.
Lenders Mortgage Insurance (LMI)
If your deposit is less than 20% of the property’s value, the lender may require Lenders Mortgage Insurance (LMI). This insurance protects the lender, not the borrower, in case you default on your loan. Some government-backed schemes and first-home buyer programs may offer exemptions or reduced LMI costs.
Loan Term
The loan term is the period over which you agree to repay your loan. A typical loan term is 30 years, although shorter options are available. Shorter loan terms often come with higher monthly repayments but lower overall interest costs.
Loan to Value Ratio (LVR)
Loan to Value Ratio (LVR) measures the size of your loan compared to the value of the property. It’s expressed as a percentage. For example, if you are buying a property worth $500,000 and your loan is $400,000, your LVR is 80%.
Lenders generally prefer an LVR of 80% or less, which corresponds to a 20% deposit. However, some schemes allow for higher LVRs with lower deposit requirements.
Offset Account
An offset account is a transaction or savings account linked to your mortgage. The balance in this account is "offset" against your home loan balance, reducing the amount of interest you pay. For example, if you have a loan balance of $400,000 and $20,000 in your offset account, you will only be charged interest on $380,000.
Pre-Approval
Pre-approval is an indication from a lender of the amount you might be able to borrow. It’s based on a preliminary assessment of your financial information and is not a guarantee of final approval. However, it gives you a solid understanding of your budget and strengthens your position as a serious buyer when house hunting.
Principal
The principal is the original loan amount or the remaining balance of the loan, excluding interest. With a principal and interest loan, your repayments cover both the interest and a portion of the principal. In contrast, with an interest-only loan, your repayments only cover the interest, and the principal remains unchanged until the interest-only period ends.
Property Appraisal
A property appraisal (or valuation) is an assessment of the property’s market value conducted by a licensed valuer. This is often required by lenders to ensure the property is worth the amount being borrowed.
Redraw Facility
A redraw facility allows you to access extra repayments you’ve made on your home loan. This feature provides flexibility, enabling you to reduce interest costs while still accessing funds if needed.
Settlement
Settlement is the final step in the home-buying process. This is when the property ownership officially transfers from the seller to the buyer. Your lender will disburse the loan funds to the seller, and the property is legally yours from the date of settlement.
Stamp Duty
Stamp duty (or transfer duty) is a tax levied by state or territory governments on property transactions. The amount varies depending on the value of the property and its location. First-home buyers may be eligible for reduced or waived stamp duty, depending on the state’s first-home buyer incentives.
Unconditional Approval
Unconditional approval means that the lender has fully assessed and approved your loan application with no outstanding conditions. This final approval is required before you can move forward with purchasing a property.
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