How to Buy Your First Home: A Guide to Navigating Broker Jargon
Buying your first home is an exciting and rewarding milestone, but it can also be daunting and overwhelming. There are many factors to consider, such as finding the right property, saving for a deposit, applying for a home loan, and navigating the legal and administrative processes.
One of the most challenging aspects of buying your first home is understanding the mortgage jargon. There are many terms and acronyms that you may encounter, and they can be confusing and intimidating. To help you get started, here are some of the most common and important mortgage terms that you should know, and what they mean for you.
Mortgage
A mortgage is a type of loan that you use to buy a property. The property acts as security or collateral for the loan, meaning that the lender has the right to take possession of the property if you fail to repay the loan. A mortgage typically has a term of 25 to 30 years, and you make regular repayments of principal (the amount you borrowed) and interest (the cost of borrowing) until you pay off the loan.
Interest Rate v.s the Cash Rate
The interest rate of your loan is not going to be the same as the cash rate, which is due to the cash rate being the interest rate set on banks that take loans from other banks for daily liquidity (so they can honour the amount of cash needed on a daily basis for payments). Without going into the mechanics of banking, all you need to know is, that the cash rate is interest paid by the bank on overnight loans from other banks, and the interest rate on your loan is therefore affected due to the banks adjusting their loan rates. The reason for this is so the banks still make a profit off the loan they gave you towards buying your first home, as they have shareholders and employees to keep happy.
Fixed Rate v.s Variable Rate
Your mortgage broker will ask you whether you would like to fix your interest rate or leave it as variable. The difference between the two is a fixed rate would keep your interest rate the same for the length of time you wish to fix it for, whereas variable is constantly changing with the cash rate. As an example, a lot of people fixed their home loans at record lows for 2 or 3 years at 2 to 2.25% during the pandemic years when the cash rate (see above) was held at record lows. Whereas, for those that left their loan at variable, would have seen their interest rate increase with every cash rate rise administered by the Reserve Bank of Australia. You should talk to your broker to see whether a fixed or variable rate loan will work best for your circumstances.
Deposit or Equity
The deposit you have built up by saving cash is the amount you will pay down on your first home. When buying your first home, this would generally also equal the equity you hold in your home. Your initial deposit is really important in your borrowing capacity, as it shows banks/lenders that you are able to save and have financial stability to afford your first home. However, it is also really important as if you have a 20% deposit or higher on your home (Eg; $500,000 home, $100,000 deposit = 20% deposit), you will not need to pay Loan Mortgage Insurance (See below). The longer you own your home, the more principle (see below) you will pay off the loan, which will increase your equity in the home as well.
Principle and Interest
You will generally find that your first home is a principle and interest loan, which means you are partially paying off the loan each fortnight or month. The principle will pay down the loan, whereas the interest paid is the amount paid based on your interest rate and that is calculated daily. For example, your loan repayment might be $2,000 per month, and the principle that goes towards paying down the loan is $800 and you pay interest of $1,200. If your mortgage was $200,000, your first payment with $800 principle would bring down your loan to $199,200. The interest would therefore be calculated on the remaining amount of the loan, being $199,200.
LVR
LVR stands for loan-to-value ratio, and it is the percentage of the property’s value that you borrow. For example, if you buy a property worth $500,000 and borrow $400,000, your LVR is 80%. The LVR is an important indicator of your borrowing capacity and risk level. Generally, the lower your LVR, the better, as it means you have more equity (the difference between the property’s value and the loan amount) and less debt. Most lenders require you to have an LVR of 80% or less, or else you may have to pay LMI.
LMI
LMI stands for lenders mortgage insurance, and it is a type of insurance that protects the lender in case you default on your loan. LMI is usually required if your LVR is higher than 80%, as it means you have a higher risk of not being able to repay the loan. LMI is a one-off fee that you pay at the start of the loan, and it can vary depending on your LVR, loan amount, and lender. LMI does not protect you as the borrower, and it does not cover the full amount of the loan. You are still responsible for repaying the loan and any shortfall if the property is sold for less than the loan balance.
Offset account
An offset account is a type of transaction account that is linked to your mortgage. The balance in your offset account reduces the amount of interest you pay on your loan. For example, if you have a loan balance of $400,000 and an offset account balance of $50,000, you only pay interest on $350,000 of the loan balance. An offset account can help you save money on interest and pay off your loan faster. It also gives you easy access to your money, as you can withdraw and deposit funds anytime. Generally there is an annual fee for an offset account.
Redraw facility
A redraw facility is a feature that allows you to access any extra repayments that you have made on your loan. For example, if your minimum monthly repayment is $2,000 and you pay $2,500, you have an extra $500 that you can redraw later. A redraw facility can give you flexibility and peace of mind, as you can make extra repayments to reduce your interest and loan term, and still have access to your money if you need it. However, some lenders may charge fees or have limits on how much and how often you can redraw.
Conveyancer
A legal professional who offers expert advice when it comes to property transactions. Conveyancers can help you when you're buying a property, selling a property, transferring property or subdividing property. You will need a trusted conveyancer when buying your first home to complete the transaction and legal requirements.
Stamp Duty
The dreaded stamp duty is a land tax for when land passes from one person/organisation to the next and is generally waived for first home buyers that are buying a house that is fairly new or building a house under the value of $750,000.
You should discuss whether you will need to pay stamp duty or not with your broker.
Grants and Schemes
The government has a plethora of schemes and grants that are there to help first home owners get into their first home. From first home super saver scheme to the first home owner grant, there are multiple ways the government are trying to help you to get into your first home. You should be talking to your mortgage broker or financial planner/professional on ways to help save your deposit faster to help you get into your first home sooner.
Buying your first home is a big decision and a long-term commitment, but it can also be a rewarding and fulfilling experience. To make the process easier and smoother, it is important to understand the mortgage jargon and how it affects you. By knowing what terms like mortgage, LVR, LMI, offset account, and redraw facility mean, you can compare different home loan options and find the best one for your needs and goals. You can also use online tools and calculators to help you estimate your borrowing power, repayments, and savings. And of course, you can always seek professional advice from a mortgage broker who can guide you through the whole process and find the best deal for you.
Until Next Time,
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