8 terms to understand before buying your first home

Buying your first home is an exciting milestone. Saving up, searching for the perfect place, and finally moving in – it’s a transition you’ll remember forever. But among the excitement, the home loan landscape can feel overwhelming. It’s important to ask as many questions as you need to feel confident and comfortable with the process. Schooling up on common home loan language can help, too. Here are 8 common terms you’ll hear on your first home journey and what they mean for you.

Serviceability

You may hear the term serviceability when you apply for your home loan preapproval. Serviceability essentially means your ability to repay the loan you’re applying for. Lenders will look at your income and your expenses and stress test your financial capacity to repay the loan. When assessing how much you can afford to borrow, your lender will use a ‘serviceability rate’, which is a rate slightly higher than the current interest rate, to ensure you’re in a position to handle rate changes throughout the life of your loan.

Offset

An offset account is a separate transaction account that is linked to your home loan. The money in this account remains your savings. The key benefit is that the balance in this account is 'offset' against your loan principal when interest is calculated. For example, if you have a $600,000 loan and $50,000 in your offset account, you only pay interest on $550,000. You can access your funds at any time for any purpose.

Redraw

A redraw facility allows you to access any extra repayments you have made on your home loan over and above the minimum required repayments. By making extra repayments, you pay your loan down faster and reduce the interest you pay. The redraw facility then gives you the option to withdraw these additional funds if you need them. It is important to understand that redraw is different from an offset account; when you make an extra repayment, that money becomes part of the loan balance. Redrawing means you are re-borrowing money that you have already paid off. Access to these funds may also be subject to certain conditions.

Interest rate

On a principal and interest mortgage, your repayments are made up of a chunk of the principal (the amount you borrowed) and interest (the charge for borrowing). Your interest rate is the percentage of the amount you owe that you’ll pay back on top of your loan repayments. This is calculated as a percentage per year, and paid on top of each of your repayments.

LMI

LMI stands for Lender’s Mortgage Insurance. It’s a type of insurance that protects the lender in the event you default on your loan repayments. This fee is a once-off payment when you take out your loan, and usually applies if you are borrowing more than 80 per cent of a property’s value. There are exemptions for workers in certain industries, or for first home buyers under certain government schemes.

Stamp duty

Stamp duty, sometimes called transfer duty, is a tax paid to your state government when you buy a property. It is calculated as a percentage of the total price you paid for the property, or the market value, whichever is higher. The amount you’ll pay will vary depending on which state or territory you live in, the value of the property or land you’re purchasing, and whether the property is to live in or an investment.

Settlement

Settlement is the completion of the sale transaction between a seller and a purchaser. This happens on the day your lender hands over the funds to your vendor and the property becomes legally yours. A legal professional, known as a conveyancer, will work with your lender to facilitate this transaction.

Refinancing

Once you’re a homeowner, you have the option of refinancing your home loan. This means changing your mortgage from one loan to another. You may do this to change lenders, obtain a lower interest rate, or access equity you’ve built up in your property.

For more information on buying your first home visit: www.bendigobank.com.au/personal/home-loans/first-home/

Any advice provided in this article is of a general nature only and does not take into account your personal needs, objectives and financial circumstances. You should consider whether any financial product is appropriate for your situation. Please read the applicable product disclosure statement(s) on our website before acquiring any product