Banking jargon explained
We’ve listed some common banking terminology that’s used to describe home loans.
Loan to Value Ratio (LVR): the percentage of the property value that you’re borrowing. Let’s say your deposit is $50,000, the purchase price is $400,000 and the loan amount is $350,000, then the LVR is 87.5%.
Comparison rate: often referred to as the ‘true cost of a home loan’, the comparison rate includes the interest rate, application fees and any other fees or charges that are known will apply during the loan term.
Lender’s Mortgage Insurance (LMI): a one-off premium that is added to the loan and paid for by the borrower and is normally payable if the Loan to Value ratio is above 80%. LMI protects the lender against loss if the security property is sold for a price which is lower than the loan balance.
Credit score: a numerical score that evaluates credit worthiness based on credit history. The higher the score, the more credit worthy you are.
Equity: the difference between the value of your property and the amount of money that you owe on it. If your home is worth $550,000 and you owe $400,000 on your loan, your equity is $150,000.
Fixed rate: an interest rate that stays the same for a set period of time, typically between 1–5 years.
Variable rate: an interest rate that can vary up or down at any time.
Offset account: a transaction account that is linked to your home loan. The money that you have in this account reduces (offsets) your total home loan balance, and you’re only charged interest on the reduced balance.
Redraw: allows you to access extra repayments above the minimum required amount that you’ve made on your home loan. Maintaining an available redraw balance will continue to reduce the total interest that you’re paying on your home loan.