Whether you are a first time home buyer or have been within this circle before, you must know what a tiring process buying a home is. Moreover, if this process involves a home loan, then you have to deal with bulky paperwork and uncountable legal formalities.
Finding purchase-worthy properties and shortlisting one already sounds like a roller coaster ride, and on top of that, your spirit is bogged down with the real estate industry jargon used by lenders and agents. This sends your thoughts spinning, leaving you with a headache at the end of the day.
“Buying a home is an easy task,” said no one ever. There are a lot of things running out of your control. Yet amidst all this, there is one thing that you can still get hold of, the loan jargon.
It’s true that Rome was not built in a day, and you too would not be able to remember everything word to word right away. But, all you need to do is know whatever can make the deal count.
So, here are 9 home loan terminologies that you must understand before taking the plunge:
First Home Owners’ Grant (FHOG)
FHOG applies during a home loan when you plan to buy or construct your first residential property in accordance to the local planning standards in Australia. The grant amount, provided by the government, is decided as per the date on which the contract to purchase or build a home is entered into.
You are not eligible for FHOG if you or your partner have previously:
- taken a first-home owner grant in Australia or
- purchased a home in Australia, either together or independently before July 1, 2000.
Additionally, to receive the FHOG either one of the applicants should:
- have the intention to live in the house as their principal place of residence for a period of at least 12 consecutive months
- be 18 years of age or above
- be a citizen or permanent resident of Australia.
Lender mortgage Insurance (LMI)
Generally, it is the requirement for borrowers to have at least a 20% deposit. However, with the use of LMI, lenders can offer home loans of lower deposit.
LMI is a small amount of money paid to the lender as an insurance for situations when the borrower defaults at the monthly repayments of the mortgage. It is ideally meant to protect the lender in such circumstances, although it also allows the borrower to loan 95% of the purchase price of the property.
Lender Charges or Application Fees
This is the fee that is charged to completely or partially cover the cost for a lender while considering a loan application. This is also known as an establishment or application fee by some lenders.
The fees are sometimes required to be paid beforehand and are not usually refundable unless the loan is refused.
Comparison rates help you identify the true cost of a loan. It includes the interest rate and most of the fees and charges that are payable during the life of your loan. It is useful to compare between different lenders and the interest rates they are offering.
Variable rate: This interest rate keeps changing during the term of the loan, in accordance with market forces.
Fixed rate: In this case, the interest rate is fixed for the complete period of the loan term; however, it is usually a little higher than the variable rate of interest.
Would it not be nice to make additional payments as a saving that you can withdraw later in time of need? A redraw facility in a home loan allows you to do exactly that. But how is this different to offset account? Well, redraw facility actually reduces the principal from your home loan account while offset account only reduces that amount for interest calculation.
As and when you make additional repayments towards your loan account, the remaining principal amount of your loan is reduced and you pay lesser interest. Further, when comes a time of financial crisis, you can withdraw these additional repayments like the usual savings you do, without affecting your overall loan amount or future monthly repayments.
Redraw facility has two main features:
First, it can save on the interest costs on your home loan; and second, it provides flexible access to funds when they are most needed. A redraw facility is available on most variable rate loans but is not available on fixed rate loans.
Mortgage Offset Account
When your savings account gets linked to your home loan you call it a mortgage offset account. You might be wondering, “How is this account different from my savings account?” “How does linking my savings account to my home loan affect the loan?”
Well then, the answers to your questions would be as follows:
First, the mortgage offset account is just a normal savings account.
Second, increasing the amount in the savings account, decreases your home loan’s principal amount. Thus, also decreasing the interest payable on your home loan. For instance, The balance in an offset account reduces an equivalent amount from your home loan’s principal amount for interest rate calculation. For example, in case of a 100% offset account, if you have $20000 in your offset account and $250000 as the remaining principal for your home loan; then you will be charged interest on $230000($250000-$20000).
You can also opt for partial offset accounts. In case of these accounts, the interest that you earn is only a part of the rate paid on the home loan.
Another benefit of having a mortgage offset account is reduction in your tax bill. Any taxable income gets canceled from the deposit accounts against the interest paid on mortgage repayments.
If during a property sale, you are designated units within a building (apartments), jointly owned by different individuals, then you would require this title.
Every owner involved in a strata plan shares common property which comprises of things like windows, external walls, roof, foyers, lawns, fences, or gardens. This is why the Strata Title comes handy if you are looking for some kind of a declaration of ownership of the property.
Tenants in Common
The Tenants in Common agreement is a shared ownership of the property. Each party owns an individual (equal/unequal) portion of the property. And this agreement mentions the percentage owned by each person.
The agreement usually comes into play when a property is purchased either along with friends or family members.
Settlement means the settlement of property, which includes remunerating the seller with the outstanding amount of the purchase price (purchase price of property minus the upfront deposit paid).
Here, you will receive the keys to your new home and become the legal owner of the property.
So, these are the 9 less known and most confused home loan terminologies which you’ll find in the process of taking out a home loan. Home hunting should be an exciting and happy journey and familiarizing yourself with these terms will surely ensure it. All you need now is proper research and good negotiation skills and you are good to go.
Happy house buying to you.