5 Terms Every New Home Buyer Needs To Know

If you’re a first home buyer, you may be overwhelmed with a considerable amount of information to process before you’ve even started looking at new homes or new home builders in Perth. If you’re not sure about the lending jargon that’s out there and want some clear definitions to help you make that first investment, then read on to learn the 5 terms every new home buyer needs to know…

Pre-approval

A bank may offer you pre-approval, where they advise how much you can borrow, based on lending terms and conditions. Once you have pre-approval, you can start looking for a property.

Interest Rate

This is the rate of interest a bank or other financial institution (the lender) sets on the cost of lending you money. Interest rates often trend in the same direction as the Reserve Bank of Australia’s official cash rate.

The two main types of interest rates are variable and fixed. A variable interest rate can move up or down at any time, while a fixed interest rate remains the same over an agreed-upon period.

Offset Account

An offset account helps reduce interest costs on your loan. By linking the mortgage account to your deposit or transaction account, any balance in this connected account offsets the loan principal on your mortgage and means that subsequent interest payments will be less.

Think of it like this: if your mortgage is $300,000 and your offset account has $15,000 in it, you’re only charged interest on the first $285,000 of the mortgage, not the total amount.

Borrowing Capacity

The most amount of money you can borrow and safely repay, based on your current financial status, is called your borrowing capacity.

Stamp Duty

Stamp Duty is a Government-imposed tax on the purchase of real estate. This is extra, on top of your property’s purchase price. Stamp Duty is paid when purchasing a property, although you may receive a rebate after the property has settled. The Australian Government offers concessions for first-time buyers, and in WA, first home buyers only pay stamp duty after $430k, with a concession max of $14.5k.

Loan to Value Ratio (LVR)

LVR is the amount you are borrowing, in ratio to the value of the property you wish to buy, expressed as a percentage. Lenders use LVR to assess the ‘risk’ of a home loan.

If the LVR exceeds 80%, lenders often require Lender’s Mortgage Insurance or a guarantor to offset their risk.

Lender’s Mortgage Insurance (LMI)

Lender’s Mortgage Insurance (LMI) is the insurance a lender takes out on a loan to protect itself if the borrower defaults on a mortgage. LMI is typically requested for loans 80% or more of a property’s value.

Note: LMI is a cost that you may have to pay but it protects your lender (bank) – not you. Avoid paying LMI by saving a deposit of more than 20% of the home’s total cost.