Home Loan Information — Clarifying Banking Terms
I recently had a request to clarify LVR. As a finance broker who has been helping buyers in the Home Loan and First Home Buyers market from Sydney Northern Beaches to Inner West to Sydney North Shore, it's easy to forget some buyers may feel a little lost in the maze of banking terms. This lead me to thinking perhaps a quick post on typical home loan terms may be helpful, particularly to those in the First Home Buyers category.
- LOAN TO VALUE RATIO (LVR)
The LVR refers to the size of your home loan expressed as a percentage of your property's value. For example, if you borrow $100,000 to fund an asset worth $125,000, the loan is said to have an LVR of 80% ($100,000 is 80% of $125,000).
- EQUITY
The difference between the amount owed on your home loan and your home's value.
- EXTRA REPAYMENTS
Allows you to use extra cash to reduce the outstanding principal and interest on your home loan. This is a great way to pay off your loan faster.
- FIXED RATE
An interest rate that allows you to lock in to a specified rate of interest, with fixed monthly repayments, for a given period of time.
- INTEREST ONLY
A type of loan that requires repayments on the interest only and, as such, leaves the loan principal untouched.
- CREDIT LIMIT INCREASE
Increasing the amount of money in your home loan. Note that stamp duty applies.
- OFFSET ACCOUNT
Some lenders offer an 'offset' account, which is a savings account linked to your home loan. It can be a great way to save on interest costs because interest charged on the home loan is calculated on the difference between the balance of your loan amount owing and the balance in your savings account. For example, if your balance on your home loan is $250,000, and you have $10,000 in your savings offset account. Instead of being charged interest on the full value of your home loan, interest will be charged on a balance of $240,000 - being the difference between the balance of your loan and the money in your offset account.
- PRINCIPAL AND INTEREST
A type of loan where each repayment is comprised of interest plus a reduction in the loan principal.
- REDRAW
This loan feature lets you withdraw any additional repayments you have made on your home loan. It is a useful way to reduce your interest while providing access to your funds.
- SWITCHING
Changing from a variable loan to a fixed rate loan. Can be useful if you are concerned about a possible rate rise.
- SPLIT LOAN
A loan that combines a fixed rate portion and a variable rate portion.
- VARIABLE RATE
An interest rate that will vary in line with changes to official interest rates.
- VARIATION
A change to the home loan agreement.
If you are thinking about a loan, we would love to help — Reuben