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By Adam Smith | Journalist at finder.com.au

For a country with such an obsession with property, you’d think Australians would be veritable experts when it comes to the home loan market. But that’s actually not the case at all.

In fact, a recent finder.com.au survey found that 16.77% of home loan customers don’t even know what their current interest rate is.

While it’s important to be across information like this, you could definitely be forgiven for having less than expert knowledge of the ins and outs of home loans. However, if you educate yourself on a few of the key terms and how they can impact you and your home loan, you’ll be far more informed than the average consumer. Here are seven home loan terms that you should know. 

LVR

LVR stands for loan-to-value ratio. Put simply, this is how much you owe on your home (your loan amount) versus how much you’ve already paid off. The number is expressed as a percentage. For instance, if your home is worth $500,000 and you’ve paid a $50,000 deposit, you would owe $450,000 and your loan-to-value ratio would be 90%.

This term becomes very important when you’re buying a home. Lenders have a maximum loan-to-value ratio that they’ll accept, which means you’ll need a deposit of a certain size to qualify for that home loan. Most lenders will accept an LVR of 80%, meaning you’ll need to pay a deposit of 20%. Some will accept up to 95% if you pay for LMI.

LMI

So what is LMI? LMI stands for lenders mortgage insurance. This is an insurance policy that covers your lender in the event that you default on your home loan. LMI is charged on loans with a loan-to-value ratio of higher than 80%, and it’s charged on these loans because they’re deemed riskier.

Even though LMI covers your lender, you bear the cost of it. The amount you pay will come down to the loan-to-value ratio of your home loan and the size of your home loan. While there’s no set formula publicly available to figure out how much you’ll pay for LMI, this calculator will give you a good estimate.

You can avoid paying for LMI entirely if you pay a large enough deposit when you buy your home. Having a large deposit makes you a lower risk by giving you more equity.

Equity

Equity is the difference between what your home is worth and the amount you owe on your home loan. For instance, if your home is worth $700,000 and you owe $500,000 on your home loan, you’ve built up $200,000 in equity.

You can build equity in two ways. Firstly, you build equity every time you make a home loan repayment. By reducing the amount you owe on your home loan, you’re increasing the amount of equity in your home.

The second way you build equity in your home is through your property gaining value. Your equity position is improved by capital gains.

Capital gain

A capital gain is any increase in the value of your home. Property prices have a tendency to increase over time, so if you bought your home some time ago it’s likely to have increased in value. This rise in property value is called a capital gain.

In addition to the general rise in property prices, you can also add value to your home in other ways. You could renovate or expand your home, or even just increase its curb appeal through landscaping or painting. Anything you do to increase the value of your home will increase your capital gains.

Offset account

An offset account is a feature offered by some home loans that allows you to reduce the amount of interest you pay and potentially pay off your home loan faster. Offset accounts are transaction accounts linked to your home loan and they work by reducing the amount on which interest is calculated. 

When your lender is calculating how much interest to charge, they will deduct the amount in your offset account first. For instance, if you owe $500,000 on your home and have $50,000 saved in an offset account, you’ll only be charged interest on $450,000. This can help you pay off your home loan years ahead of time and save you thousands in interest charges.

Redraw facility

Many home loans offer you the option of paying extra so that you can get ahead on your repayments. It’s handy to build a buffer and if you end up needing to access those funds in the future a redraw facility can help.

A redraw facility allows you to withdraw any extra funds that you’ve paid towards your home loan. You can use the funds for any purpose and because they’re surplus funds, you don’t have to repay them.

Some redraw facilities have minimum withdrawal amounts and some will charge you a fee for any withdrawals. Regardless, a redraw facility is a handy feature that can give you added flexibility in your home loan.

Split facility

One of the major choices you’ll have to make when deciding on a home loan is whether to choose a variable rate or a fixed rate. Variable rates offer flexibility, while fixed rates offer certainty and stability. The choice between the two can be difficult, but a split facility means you won’t have to choose.

A split facility allows you to split your home loan into portions. You could choose to have a portion with a variable rate and a portion with a fixed rate. Split facilities also allow you to access features from multiple home loan products. You could choose to have one portion of your home loan with a product that offers an offset account and another portion with a lower-cost, no-frills product.

Many home loans will allow you to split your account multiple times and some will even allow you to split your loan for free.

Summing up

When you’re choosing a home loan, you’re likely to hear a lot of unfamiliar terms thrown around. It can all feel a little intimidating, but if you take a bit of time to familiarise yourself with what these terms mean, you’ll be able to make a more informed decision.


Important information

Information on this website is general and has been prepared without taking into account your objectives, financial situation or needs. You should consider whether this information is suitable for your objectives, financial situation and needs before acting on the information provided.