Mortgage Jargon Busting: 5 Important Terms For First Home Buyers

Written by in Finance on January 15, 2014

Mortgage Jargon Busting: 5 Important Terms For First Home Buyers

First home buyers are generally inundated with a huge amount of information to process when they’re researching property purchases and home loans. If you’re not sure about all of the mortgage jargon that’s out there and hope to find some clear definitions to make that first investment less difficult, then read on for 5 financial terms that first home buyers simply need to know. For further information though, don’t forget to seek professional advice from a mortgage broker, such as Mortgage Choice, or financial planner who can help you find the right loan for you.

Interest Rate

An interest rate is the rate of interest that a bank or other financial institution (the lender) sets on the cost of lending you money. The interest rate usually trends in the same direction as the Reserve Bank of Australia’s official cash rate (though not always). There are two main types of interest rates to be aware of: variable and fixed. A variable interest rate is one that can move up or down at any time and again is usually set in conjunction with the RBA’s rates. On the other hand a fixed interest rate is one that will remain the same over an agreed upon period of time. Unlike a variable interest rate loan, where minimum repayments vary according to the interest rate, the repayments for a fixed interest loan will always stay the same over the agreed period.

Offset Account

An offset account is used as a means of reducing interest costs on a loan. This is done by linking the mortgage account to the customer’s deposit or transaction account. Any balance in this linked account offsets the loan principal on your mortgage and means that subsequent interest payments will be less. For example, if your mortgage is $300,000 and you have an offset account with $15,000 in it, then you are only charged interest on the first $285,000 of the mortgage, rather than on the full amount.

Honeymoon Rate

Lenders often try and tempt customers to choose their lending facility by offering what’s known as a “honeymoon rate” – a much cheaper rate than normal – at the beginning of a loan period. A lower interest rate is usually given for the first 12 months of a home loan, after which time the rates then increase. People taking up this offer need to do their research however, as often the long term rate that applies after the honeymoon period is much higher than normal and detrimental to the borrower’s financial position as a result.

Comparison Rate

In order for consumers to be able to have a chance to identify the true cost of a loan, a comparison rate is advertised by lenders. This rate includes the interest rate itself plus any fees and charges relating to the loan. These figures are combined into a single percentage that is based on the term of the loan, the repayment frequency, any fees and charges and the actual standard interest rate.

Lender’s Mortgage Insurance

Nothing says mortgage jargon like Lender’s Mortgage Insurance (commonly known as LMI). But it is simply the insurance that a lender takes out on a loan to protect itself in case the borrower defaults on a mortgage. LMI is generally always a necessity for any loans that are for 80 per cent of a property’s value or higher. Note that it is a cost that you will have to pay, but it protects your lender for default – not you. To avoid paying LMI, save up deposit of more than 20 per cent of the total cost of the home. Check out this post to get an indepth idea of LMI and what it means to you the buyer.