Talk like a mortgage broker - your guide to the finance lingo
While Lenny is a strictly Finance Bro-free zone, there is some terminology that we use every day, that you might not be familiar with. We’ve put together a Lenny Mortgage Dictionary to break down some of the most common phrases you might hear, and exactly what they mean.
Comparison Rate
Translates to: comparing mortgage products including all fees to present an overall better picture
What does it mean: Looking beyond more than just the interest rate, using a comparison rate will give you a more ‘apples for apples’ comparison of various mortgage products.
Credit Report
Translates to: reports on your debts and creditors compiled by independent credit reporting agencies
What does it mean: Your credit report is a collation of your personal debts, credit enquiries and bill repayment history. Lenders will use this report as a part of their assessment when you are seeking a mortgage. You can find out more about credit reports here.
Equity
Translates to: The difference in the market value of your home, and the value of your mortgage.
What does it mean: You might consider the equity in your home as the amount you own. During the course of your loan, you may wish to ‘access’ the equity in your property by refinancing for things like holidays, renovations or investment property purchases.
Favourable Purchase
Translates to: purchasing a property for significantly less than the market value
What does it mean: often favourable purchases are between family members, where the seller may wish to assist the buyer in purchasing the property by selling it at a price that is significantly less than its market value giving the buyer instant equity in their purchase. You can find out more about favourable purchases here.
Fixed Rate
Translates to: a fixed rate of interest applied to a mortgage for a fixed period of time
What does it mean: When arranging your finance, you may choose to have a fixed-rate mortgage instead of a variable rate. A fixed rate of interest is often higher than the variable counterparts and may come with limitations on additional repayments and things like offset account, but will bring surety knowing that repayments aren’t influenced by rate risers. Conversely, you’ll miss out on any rate reductions if you choose to fix all, or part of your mortgage.
Genuine Savings
Translates to: cash savings the bank considers to be genuine for the purpose of applying for finance.
What does this mean: when you’re applying for a home loan, lenders like to see you are able to save some of your income and have savings that aren’t forming a part of your everyday spending. This is called genuine savings. Genuine savings can include regular savings you contribute from your income, tax returns, gifts of cash and other windfalls. If there aren’t periodic savings from your income the lenders will often like to see that you are able to hold the cash for a period of 90 days without drawing on it.
Guarantor
Translates to: the financial guarantee from another party by way of security of their own property, or colloquially you might call this the bank of Mum and Dad.
What does it mean: To help you get into a home sooner and with a smaller deposit, a relative may offer to go Guarantor for you. This means they use their home as security for a percentage of the purchase of your property and in the event you are unable to pay your mortgage, that house could be sold to recover the funds. This is a great option for buyers looking to break into the market who have parents who want to help them, but may not have the cash to gift them. This helps the buyer avoid LMI and the Guarantor can be removed from the mortgage once the purchased property has 20% equity available.
Interest Only
Translates to: An arrangement to pay only the interest payable on your mortgage for a fixed period of time.
What does it mean: For a variety of reasons you may wish to arrange your mortgage, or a portion of your mortgage to be interest only - often this is used for investment properties or new builds under construction. This provides you with a reduced repayment amount but means you are not paying any of the principal off the loan.
Joint Tenants
Translates to: a legal arrangement where two or more people own a property together with equal rights and obligations.
What does it mean: When two or more people purchase a property as joint tenants, they are legally obliged to be equally responsible for the payment of the mortgage regardless of arrangements made between the parties domestically.
LMI
Translates to: Lenders Mortgage Insurance
What it means: In some instances when you have less than a 20% deposit of the purchase of a property, the lender will impose LMI which is their insurance in case you default on the loan. The LMI is calculated in tiers, so the greater your deposit, the less LMI you’ll pay.
There are a few ways you can avoid LMI with a deposit of less than 20%
Using a guarantor
If you’re a doctor, allied health or medical professional or vet, some lenders will consider providing finance with a 5-10% deposit and importantly, no LMI.
Some incentives and home-buying schemes allow you to purchase a property with a smaller deposit without LMI.
LVR
Translates to: Loan Value Ratio
What it means: The LVR expressed as a percentage, Is the ratio between the value of your loan divided by the value of the property in question (e.g. your loan is 400k and the property value is 500k, 400/500 = 80% therefore your LVR would be 80%). This is an important consideration for lenders when assessing your application. A lower LVR, where you have a great percentage deposit is typically favourable to a high LVR where you have a smaller deposit and larger loan.
Offset Account
Translates to: A special kind of bank account attached to your mortgage where the balance of the account offsets the interest calculated on your loan.
What it means: If you want to keep cash reserves, while also reducing the interest payable on your mortgage, an offset account might be what you need. Use this account like you would any other bank account, for deposit of income and spending and the balance will offset the interest of your home loan. Depending on the amount you keep in this account it can make a significant difference to your interest payable.
Pre-approval
Translates to: Sometimes known as conditional approval, is when a lender agrees in principle to loan a buyer an amount of money, subject to certain conditions.
What it means: When you’re looking for a property, it helps to know how much the bank is willing to loan you so you can confidently make offers. Your broker will be able to provide you with a good understanding of what you can offer and the conditions around the pre-approval.
Principle and Interest
Translates to: Sometimes referred to simply as ‘P&I’ this is the term given to making mortgage repayments that pay down both the principal of the loan and the interest accruing.
What it means: When you are paying P&I on your mortgage, you are actively paying down the loan.
Unconditional Offer
Translates to: Making an offer on a property without any conditions, also commonly referred to as a cash unconditional offer.
What does it mean: The property market in Australia is still hotter than Bondi on a summer's day, which means you might need to get competitive and strategic with your offer. One way to do this is to make an offer with no strings attached - not conditional on finance, building and pest or the sale of your own property. To a vendor, this means they can feel secure that the deal will go through and help them plan their next steps.
Making an unconditional offer carries risks, you should always consider your personal circumstances and consult with your trusted broker, accountant and conveyancer when considering an unconditional offer.
Refinancing
Translates to: Revisiting the loan of your property to change the terms or particulars of your finance, this could be restructuring with an existing lender, or moving to a new lender.
What does it mean: During the life of your mortgage you may look to refinance for various reasons; your circumstances have changed, you wish to access some of the equity in your home or a relationship has broken down. Your mortgage broker can help you to refinance and make the experience as seamless as possible.
Settlement
Translates to: The time the purchase of a property is finalized, the monies are paid to the vendor and the Title is transferred to the buyer.
What does it mean: Settlement is arguably the most exciting part of the home-buying journey. Settlement is mutually agreed upon by both parties for an exact time and day where banks will organise the execution of funds to be transferred and the broker and conveyancer handle the finer details. Once settlement is completed it’s time to get the keys and say hello to your new home!
Stamp Duty
Translates to: The state tax payable on the purchase of property and land
What does it mean: One of life's guarantees? Taxes! Each state and territory in Australia imposes a tax, called Stamp Duty on the purchase of a property, or land. This is calculated as a percentage of the purchase price and differs by each state. In most states and territories, there are stamp duty concession schemes for first-home buyers.
Valuation
Translates to: The value of a property as determined by a valuer appointed by the bank, typically by the buyer's lender.
What does it mean: When loaning funds to purchase a home, the bank needs to conduct their due diligence and part of that is ensuring that the property you are purchasing is not valued at significantly less than the purchase price. If that happens, you can read more about how your broker can help.
Variable Rate
Translates to: A variable rate of interest determined by the banks and susceptible to the rise and fall of the cash rate.
What does this mean: In contrast to a fixed-rate mortgage, a variable-rate mortgage offers a lower interest rate but is subject to fluctuations in the interest rates set by the banks. It’s important to remember that even a small increase in the interest rate can make a significant impact on your repayments.
Any others you can think of we haven’t covered?
Uncover more about mortgages by booking a call with Lenny.