Andrea Sophocleous gives the low down on home loan jargon.
November 9, 2009
Buying a new home is a trying time and the jargon bandied about by mortgage brokers, banks and real estate agents can add to the confusion.
Whether you’re buying your first home or trading up or down, the process of finding the right home loan for your needs can be long and laborious. Getting your head around the concepts involved can make the journey speedier and less complicated. Here is a guide to some of the more confusing terms you will encounter.
Lenders mortgage insurance
Designed to protect the lender from the risk of being left out of pocket if a borrower is unable to pay off their mortgage, Lenders Mortgage Insurance (LMI) is a one-off fee paid at the time of settlement.
The insurance premium is required if your deposit is less than 20 percent of the price of the property you are buying, and can stretch into the thousands of dollars. The smaller your deposit, the higher the premium. If you cannot meet your repayments and your house has to be sold, LMI covers the bank for any shortfall should the property sell for less than the outstanding mortgage.
While LMI exists to protect the lender, not you, the advantage to home buyers is that it enables you to enter the property market sooner, without having to wait until you have saved a 20 percent deposit. If you are able to save a sizable deposit, however, you can minimise the amount of Lenders Mortgage Insurance you have to pay – or eliminate it altogether.
Mortgage protection insurance
Not to be confused with LMI, this is an insurance option available to home owners. It can cover your mortgage repayments for a set period of time if you lose your job, fall ill or run into unexpected financial setbacks. As with all insurance products, prices can vary greatly so remember to shop around.
This allows you to make extra payments on your home loan and draw on that money if you need to – for example, if you need to skip a repayment. When shopping around for a home loan, be sure to check the fine print on redraw facilities. There may be a minimum redraw amount or a fee each time you make a redraw.
A temporary loan, bridging finance allows you to buy your new home before you sell your existing home by covering the financial gap. This protects you from having to sell at a potentially low price just to secure a sale.