Terms you need to know when buying your home
Thursday, 28 March 2024
Regardless of how organised you are, buying a home can bring with it many questions and unknowns. To minimise the unknowns, it’s important to understand the home buying (or building) process and what’s involved along the way, including some of the terminology that’s going to be used by your lender, real estate agent or builder.
Without knowing the basic terms, you could be caught out with unexpected costs and extra stress. Your first home may end up being the biggest investment of your life, so we wanted to clear up the confusion around some of the more common terms you need to know when purchasing your first home.
Essentially, LMI is what you need to pay when you have a deposit of less than 20% of the cost of the property. It is a one-off charge that protects the lender in the event that you default on the loan, and it’s important to note, that this insurance does not protect you or assist with any losses you may incur.
The amount you contribute to the purchase price of the property will determine the amount of LMI charged. The lower the deposit under the expected 20%, the higher the LMI charge will be. Generally, LMI can be thousands of dollars, however it varies depending on the value of the property, the amount of the loan, and the lender. LMI is one reason it’s generally better to have a higher deposit.
TIP: At HomeStart, we don’t charge LMI – even with our low deposit home loan products. This means that you could be in your own home with a deposit as low as 2% and NO LMI charge. That’s a huge saving!
The LVR can be calculated by dividing the amount being borrowed by the appraised value of the property, which is then expressed as a percentage. For example, if the property is valued at $450,000 and you borrow $400,000, the LVR would be 88.9% (400,000 / 450,000 x 100 = 88.9). Generally, lenders offer better rates for loans with a lower LVR, but this means that a larger deposit would be required. If your LVR is high (generally considered over 80%), most financial institutions will then charge LMI.
TIP: HomeStart’s low deposit loan options means that you could have an LVR of up to 98% (meaning you only need a 2% deposit plus the cost of upfront fees) and not be charged any LMI. This is one of the many ways we differ from majority of traditional lenders.
TIP: Before the auction, check with the agent how they want to accept payment for the deposit.
There are two ways that a home can be valued; either by using a formula that includes the property characteristics, local market information and recent selling information, or through an appraisal, which is an objective estimate by a professional who can tell you how much your home is worth. The valuation is an important step in the home loan approval process, as it provides the lender with confidence that if for some reason you cannot pay your mortgage, the property could be sold to recover the debt.
TIP: So that there are no surprises, it is worth having a look at recent sale prices in the areas where you are looking, to ensure that what you are offering is on par with market data.
Still have questions about buying your first home? Try HomeStart’s free Home Buyer Ready Program, a free online tool that steps you through the process, from the deposit and upfront costs, through to settlement.
Without knowing the basic terms, you could be caught out with unexpected costs and extra stress. Your first home may end up being the biggest investment of your life, so we wanted to clear up the confusion around some of the more common terms you need to know when purchasing your first home.
Lenders’ Mortgage Insurance
Lenders Mortgage Insurance (LMI) is one of the biggest charges that can be involved when purchasing a home, and therefore, it’s extremely important to understand what it covers.Essentially, LMI is what you need to pay when you have a deposit of less than 20% of the cost of the property. It is a one-off charge that protects the lender in the event that you default on the loan, and it’s important to note, that this insurance does not protect you or assist with any losses you may incur.
The amount you contribute to the purchase price of the property will determine the amount of LMI charged. The lower the deposit under the expected 20%, the higher the LMI charge will be. Generally, LMI can be thousands of dollars, however it varies depending on the value of the property, the amount of the loan, and the lender. LMI is one reason it’s generally better to have a higher deposit.
TIP: At HomeStart, we don’t charge LMI – even with our low deposit home loan products. This means that you could be in your own home with a deposit as low as 2% and NO LMI charge. That’s a huge saving!
Loan to Value Ratio
The Loan to Value Ratio (LVR) is an assessment that financial institutions undertake before approving a mortgage, and ultimately determines the share of the home’s purchase price that you are borrowing.The LVR can be calculated by dividing the amount being borrowed by the appraised value of the property, which is then expressed as a percentage. For example, if the property is valued at $450,000 and you borrow $400,000, the LVR would be 88.9% (400,000 / 450,000 x 100 = 88.9). Generally, lenders offer better rates for loans with a lower LVR, but this means that a larger deposit would be required. If your LVR is high (generally considered over 80%), most financial institutions will then charge LMI.
TIP: HomeStart’s low deposit loan options means that you could have an LVR of up to 98% (meaning you only need a 2% deposit plus the cost of upfront fees) and not be charged any LMI. This is one of the many ways we differ from majority of traditional lenders.
Auction Day
Let’s clear this one up quickly: you need to pay a deposit on auction day! Once you successfully bid for a property at auction and sign the contract, you must pay the specified deposit amount. It’s also important to note, there is no cooling off period, so you must well and truly know how much you can afford and that your finances will be approved.TIP: Before the auction, check with the agent how they want to accept payment for the deposit.
Conveyancer
If you haven’t bought a property before, there is a good chance that you might not know what a conveyancer is and their part of the home buying journey. A conveyancer is essentially a property law specialist that manages the legal aspects of buying and selling a home. They are also the one that will coordinate the settlement time between the vendor and yourself to ensure that the transaction goes ahead with no issues and are there to represent you throughout the home buying process.Valuation
You will often hear the term valuation when buying or refinancing a home. A valuation is an estimate of a property’s value to determine how much it is worth and can only be undertaken by a registered valuer.There are two ways that a home can be valued; either by using a formula that includes the property characteristics, local market information and recent selling information, or through an appraisal, which is an objective estimate by a professional who can tell you how much your home is worth. The valuation is an important step in the home loan approval process, as it provides the lender with confidence that if for some reason you cannot pay your mortgage, the property could be sold to recover the debt.
TIP: So that there are no surprises, it is worth having a look at recent sale prices in the areas where you are looking, to ensure that what you are offering is on par with market data.
Still have questions about buying your first home? Try HomeStart’s free Home Buyer Ready Program, a free online tool that steps you through the process, from the deposit and upfront costs, through to settlement.
