Property finance is riddled with terminology and jargon that can confuse even experienced buyers and sellers, let alone first-timers.
Cash rate
The cash rate serves as a benchmark from which interest rates for home loans and savings accounts are based. It’s the rate used for unsecured overnight loans between banks or, in other words, the interest rate at which banks borrow or lend money to each other.
Each month, the Reserve Bank of Australia board meets and sets a cash rate target. Lowering the cash rate makes home loans cheaper, and is done to encourage borrowing and economic activity. Raising the cash rate increases the cost of borrowing and helps moderate economic growth, and is usually done to control inflation.
Loan-to-value ratio
This ratio reflects the size of the loan in proportion to the value of the property. It’s expressed as a percentage, calculated by dividing the amount borrowed by the value of the property.
A lower loan-to-value ratio (LVR), such as 60 or 70 per cent, will usually make a mortgage less risky for a bank. If the owner defaults and the bank forces a sale, there is a lower chance that the property’s value will be less than the loan.
Lenders mortgage insurance
Commonly abbreviated to LMI, lenders mortgage insurance protects the lender from a financial loss if the borrower defaults on a home loan and there is a shortfall in value after the sale of the property.
LMI is usually a one-off payment made by the borrower at settlement and is required when buying with a loan-to-value ratio above 80 per cent.
Home loan pre-approval
Home loan pre-approval, also known as a conditional approval, provides a borrower with a non-binding indication of the amount of money a specific lender may lend, after reviewing their financial situation. It is subject to several conditions, including a valuation of the property and further verification of the borrower’s financial information.
Pre-approval gives buyers a spending limit, as well as the confidence to pursue properties within a set price bracket and submit offers. It’s typically valid for 90 days and can be extended with updated information.
Offset account
An offset account is a bank account linked to a home loan that can reduce the interest payable on the loan.
When determining the interest to be charged on the loan, any money in the offset account is deducted from the loan balance.
For example, a borrower with a $500,000 loan and $50,000 in their offset account will only pay interest on $450,000. However, no interest is earned on money in an offset account.
source: domain.com.au