[vc_row full_width=”” parallax=”” parallax_image=””][vc_column width=”1/1″][vc_column_text]When you are new to the Home Buyer game, words and abbreviations are often thrown around and you may have no idea what they all mean. Our friends at Mortgage House have explained everything for you, so now you will be able to understand all the Home Buyer mumbo jumbo.
Fixed Rate Home Loan
A fixed interest rate home loan is usually taken out for an agreed period of time between 1 and 5 years. When this ends, you have the choice of fixing the rate again or switching to a variable interest rate. Your repayments will remain constant during the fixed term, regardless of any interest rate changes.
Progressive Fixed Rate Home Loan
This loan is similar to a standard Fixed rate home loan, with the exception that it has the ability to make extra mortgage repayments without incurring a penalty fee. Progressive Fixed rate loans generally offer more flexibility and include additional features such as a redraw facility and an offset account.
Using an offset account allows you to potentially save time and money off your mortgage simply by using your regular income. By placing any income you receive into the offset account you only pay interest on the balance of your home loan account minus that of your offset account. For example if you have a $150,000 mortgage and there is $5,000 in your offset account you will pay interest on $145,000, meaning the more in your offset account the more you save.
Variable Rate Home Loan
A Variable interest rate home loan is subject to changes in interest rates. If the interest rate rises, so will your repayments. However, if the interest rates decline, your repayments will also be reduced. Where as with a Fixed rate loan, if interest rates fall, the home loan repayment will not reduce as your repayment amount always stays the same.
Loan to Value Ratio (LVR)
The loan to value ratio refers to the proportion of money you borrow compared to the value of the property. Eg. Purchase Price $600,000 with a loan of $570,000 would be a LVR of 95%.
Lenders Mortgage Insurance (LMI)
Generally if you borrow more than 80% of the property’s value, you will have to pay Lenders Mortgage Insurance (LMI) adding additional costs to the purchase of a home. This insurance benefits the lender and protects them in the event that you default on the loan.
Stamp Duty covers the cost of the legal documents for the transaction. it is a tax charged by the government on the sale of the property. The tax is different depending on which state you live in. In NSW Stamp Duty is required to be paid three months after the exchange of contracts or on settlement, whichever is earlier. Stamp Duty is calculated on the dutiable value of the property, which is the higher of the purchase price and the current market value. Stamp Duty in NSW is around:
- $18,000 on a $500,000 purchase
- $36,000 on a $900,000 purchase
- $68,000 on a $1.5m purchase
- $95,500 on a $2m purchase
The interest rate is the rate charged by the lender to the borrower for the use of the money loaned. It is usually expressed as an annual percentage of the principal amount.
A comparison rate helps customers work out the true value of a loan. It is worked out by looking at the amount of the loan, the term of the loan, the repayment frequency, the interest rate and any fees and charges connected with the loan. It displays a single percentage rate that can be used to compare various loans from different lenders.
First Home Owners Grant (FHOG)
The First Home Owners Grant scheme was first established to offset the effect of the GST on home ownership. Under the scheme, a one-off grant is payable to first home owners that satisfy all the eligibility criteria. The grant varies from state to state similar to Stamp Duty. In NSW a $15,000 grant applies for new homes only & reduces to $10,000 on 1 January 2016. For a full list of grant information see our previous blog ‘Home Buyer Benefits’.
A Borrowing Calculator simply helps you calculate how much money you are able to borrow based on your income and assets. You will find a borrowing calculator on the Mortgage House website.
Positively geared properties are when the rental return is higher than your loan repayments and outgoings. Positive cash flow properties are self-funding and are considered to be a conservative investment strategy that provides an income with exposure to the prospect of capital growth. Keep in mind that with positive gearing there is the potential that tax will be payable on the net income (after the consideration of depreciation and other tax deductions).
Negatively geared properties are when the rental return is less than your loan repayments and outgoings (placing you in an income loss position). There is, however, the underlying expectation that the accumulated losses will be more than offset by the capital growth on the property. The key benefit associated with negative gearing is that the loss associated with the property ownership can be offset against other income earned, reducing your assessable tax income, thereby reducing your tax payable.
First Home Buyers are often shocked at the number of expenses involved in buying a property, from legal and bank fees to government charges, the costs add up. As a general rule, you should budget for around 5-10% of the purchase price to be spent on acquisition expenses.
Mortgage Registration Fee
This is a government fee paid when a mortgage is established against a property. The Land Titles office in each state or territory collects the fee for registering the lenders mortgage on the title record for the property.
When you buy a property, you buy it within a Torrens title system. The Torrens title system guarantees you the title and ownership of your property and ensures that no one can displace you. During this phase, your solicitor needs to conduct a number of searches to ensure no one else owns the land or property so you can rightfully purchase and own it.
Note: Information courtesy of Mortgage House‘s booklet “Guide to Buying Your First Home”[/vc_column_text][/vc_column][/vc_row]