Home loan basics
Thinking about taking out a new home loan but have no idea where to start? Let’s go through some of the basics you should know before signing on the dotted line.
WHAT’S THE INTEREST RATE?
The interest rate is used to calculate how much interest you need to pay on your loan. It’s what the lender charges you for borrowing money.
You’ve probably read a few articles in the news that interest rates are at record lows. So, what’s a reasonable interest rate to be paying these days? Lenders have heaps of special offers out in the market right now and it’s pretty easy to find a home loan with an interest rate below 4% p.a.
WHAT’S A COMPARISON RATE?
The comparison rate is an “all-inclusive interest rate” i.e. a rate that includes the advertised interest rate and any known fees charged by the lender during the course of the loan. For example, if the advertised interest rate on the loan is 3.75% p.a. and there’s a 4.00% p.a. comparison rate, it means you will be charged a certain amount in fees that are equivalent to 0.25% p.a. in interest.
The comparison rate is calculated on a secured loan of $150,000 over a 25 year period and excludes government charges and fees that are only charged when a specific event occurs such as redraw or late payment fees.
WHAT IS LVR?
LVR stands for loan to value ratio. It’s your loan amount divided by the value of the property that you’re looking to buy. Let’s say you’re looking at a property valued at $1,000,000. If you have a $200,000 deposit, your loan amount will be $800,000 and your LVR is 80%.
Your LVR indicates how risky your loan is. The more you want to borrow (as a percentage of the property value), the riskier a lender will consider your loan. Many lenders require you pay lenders mortgage insurance (LMI) when your LVR is more than 80%. LMI protects the lender in the case that you can’t make your repayments.
WHAT KIND OF FEES COULD I BE CHARGED?
There are three main types of fees that a lender could charge you:
1. Upfront fees – these are charged at the beginning of your loan and could include application fees, settlement fees, valuation fees, just to name a few;
2. Ongoing fees – these are charged regularly throughout the loan (e.g. monthly or yearly) and cover the cost of maintaining your loan; and
3. Discharge fees – these are charged at the end of your loan and cover the legal and administrative costs of discharging your loan.
DOES IT COME WITH ANY FEATURES?
There are many types of home loans in the market right now. Some are your basic stock standard loans and others come with lots of extra features. Some common features include:
- Offset accounts (click here to read more)
- Redraw facilities
- The ability to make extra repayments
- Packages that bundle other banking products together with your home loan
Make sure you read through all the terms and conditions as there may be fees charged when using these features.
Need help doing the sums? Find our Mortgage Calculator here.