There’s no doubt that applying for a bank loan to enter the property market for the first time is exciting! That is, once you wrap your head around a tangle of terminology in order to take the first steps. From ‘variable rates’ to ‘LVR’ and ‘LMI’, here’s an easy list to help you untangle the key terms and get back to launching your property dreams.
Applying for a home loan is exciting, but language doesn't come naturally to most of us.
LVR and LMI
Otherwise known as ‘LVR’, loan-to-value ratio compares the bank’s valuation of the property with your loan amount. As a general rule, the percentage of the loan in relation to the valuation should be 80% or lower to avoid paying Lenders Mortgage Insurance.
LMI is an insurance policy that banks take out as protection against loan repayment failures. It’s paid by you in the event of having less than a 20% deposit. LMI is something you want to avoid paying, as it is of no benefit to you. This percentage varies among institutions, so it’s important to seek financial advice regarding your personal situation.
Principal and interest
The principal of your home loan refers to the amount of money you borrow from your lender or bank, minus interest. As a percentage of the loan amount, the interest is the fee you’re charged for borrowing money.
Of your options in terms of interest rates, a variable rate changes at any time with the market, in line with the official interest rates set by the Reserve Bank of Australia and other variables, including at the banks discretion. Alternatively, a fixed rate is locked in for a specified time. Interest-only loans are also available, whereby repayments are lower. However, you still owe the full amount of principal unless you switch to a principal and interest loan.
In simple terms, stamp duty is the amount of tax payable when you buy a property. The amount charged varies from state to state and can depend on the value of the property. If you’re eligible for state-based First Home Owners Grants, you might not have to pay stamp duty.
Conditional or pre-approval is given when a lender has assessed your eligibility to apply for a loan up to a certain amount. Under these conditions, you don’t have to take the loan, nor does the bank have to lend it to you. However, it allows sellers to see that you’re a serious buying contender and it helps you determine what you can afford while looking at properties.
An offset account is a useful tool towards reducing the interest on your loan.
An offset account is a useful tool towards reducing the interest on your loan. It’s a savings or transaction account linked to your home loan that’s offset against your home loan balance. Therefore, you’re only charged interest on the difference between your home loan balance and the offset amount.
Property equity is the difference between the current market value of your property and how much you owe. Over time, the value of equity grows as your mortgage reduces and the value of the property increases. It’s possible to access your equity to secure finance for further property investments.
Funds to complete (FTC) are the applicant’s contribution to a purchase, usually the deposit and costs, including stamp duty and legal costs.
Capital growth and rental yield
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Strategies to deliver capital growth and rental yield are important when building an investment property portfolio. Capital growth, or capital appreciation, refers to the increase in value of your investment property over time.
Rental yield is calculated by taking your total annual rent and dividing it by the purchase price of your property, then multiply it by 100 to get the gross rental yield percentage. Representing yield as a percentage is a useful way to compare one property’s performance against other.
Feeling a little more ‘home loan literate’? Education is key to making informed decisions, along with professional financial advice to start a long, successful property journey on the right foot.
DPN Finance can also help you navigate the complexities of home lending to help get you into your dream home or investment sooner.
This information is provided by DPN Pty Ltd ABN: 94 630 700 186, Australian Credit Licence 514759. DPN Finance Pty Ltd is an authorised credit representative 504129 and a related entity of DPN Pty Ltd. Casa Capace Operations Pty Ltd ABN: 79 624 981 184, NDIS provider Number 4050038018 trading as Casa Capace.