Mortgage Jargon Explained
Applying for a mortgage can be stressful enough for even the shrewdest & most financially aware person. That’s before you’re faced with the mountain of paperwork required and the finance industry jargon that you’re invariably confronted with.
As someone interested in becoming a home owner for the first time, or even those re-entering the property market after a number of years, it’s crucial to understand the appropriate home loan terminology. Knowing what everything means will help you to feel a lot more comfortable throughout the process, ensuring you are getting the home loan product that best suits your needs. Below is a brief overview of the most common property jargon you’ll need to know before commencing your home loan journey.
When you apply for a home loan, it’s vital you know exactly how much money you can realistically contribute to your mortgage each month. Your mortgage broker can help you to understand exactly how much money you can contribute towards a mortgage and, armed with that information, give you an idea of your maximum borrowing capacity with a range of lenders. Each lender has different criteria so it may be the case that one can lend more than another.
To work out how much you may be able to borrow from a lender, your mortgage broker will gain home loan pre-approval. Home loan pre-approval provides you with absolute clarity with how much you can spend on a property. This helps you to avoid looking at properties that are out of your price range. Generally valid for three months, pre-approval can also give you some peace of mind before you hit the open-houses in search of your new home. Once you have found a home that ticks your boxes and sits within your pre-approved price range, you can make an offer on the property safe in the knowledge that you can afford it.
If that offer is successful, you will need to speak to your mortgage broker about getting home loan formal approval. Before your home loan is formally approved and you move into your new property however, it is important to speak with your mortgage broker about the type of home loan you would like.
There are literally hundreds of home loan products on the market, so the key is to find the one that best caters to your needs.
In order to find the right product for your needs, you will need to first identify what your needs are. Ask yourself: do you want a home loan that offers repayment stability, or are you happy to ride the current low rate wave and see where interest rates naturally go?
If you are looking for repayment stability, a fixed rate mortgage may be the ideal option for you. With a fixed rate home loan, your interest rate and monthly home loan repayments will not change throughout your fixed rate period. On the other hand, a variable rate home loan will move in accordance with changes in the marketplace. So, if interest rates move up or down, so do your mortgage repayments.
Rate isn’t the only thing to consider; In addition, you’ll have to decide which mortgage features you want as part of your loan.
There are reams of features you can have as part of your home loan. One of the most common being an offset account. An offset account is a separate account linked directly to your mortgage which can help you to pay off your mortgage faster, as any money in the account is used to offset the interest charged on your home loan. A redraw facility may better suit your needs. A redraw facility allows you to access extra repayments you have made on your loan over and above the required minimum repayments.
To have your loan formally approved, your chosen lender will want to look at your full list of assets and debts. In addition, they will assess your ability to service the loan. They will look at your living expenses, income & existing financial commitments to make sure you can comfortably make your mortgage repayments.
From there, the lender will order a property valuation to determine the value of the property and how much they are prepared to lend you. If you are borrowing more than 80% of the property’s value, your lender will require mortgage insurance approval from their mortgage insurer.
Lenders Mortgage Insurance (LMI) is an insurance that protects the lender (not you the borrower) in the event that you do not meet your agreed repayments, and, thus, default on the loan.
Once the loan has been formally approved, it will proceed to settlement, which is the day that you officially take ownership of the home and can pick up the keys to your new property. This typically occurs approximately 6 weeks after you exchange contracts with the vendor of the property.
The home loan process can be both time consuming and stressful. As a mortgage broker it’s my role to alleviate the stress and find a home loan that is best suited to your needs.
If you are embarking on the home ownership journey, give me a call on 0435 945 419 and I’ll help you establish your borrowing capacity, and assist you in understanding which loan features may suit your needs above others.