Lack an understanding of key financial concepts? You’re not alone

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While most of us fantasise about owning our first or second property, a lot of us don’t quite yet understand some of the key terms that pop up throughout the process of buying. Here are some key terms that are integral to know before you dive in. 

If you leap at the first seemingly amazing interest rate and offer you see advertised, that can often lead to big problems down the road. Navigating the property market with little to no knowledge of some essential financial terms and concepts could see you falling into common traps or getting yourself into situations that you can’t get yourself out of. 

Now, the purpose of this article isn’t to shame anyone who hasn’t already done their homework. Far from it, rather, we want to reassure you that when you come to us for a finance solution, we’ll be sure to explain any financial terms or products you don’t fully have your head around yet. And that’s one of the key differences between us and the big banks. We’re not just satisfied with matching you up with a home loan, we want you to be confident that it’s the right one for you, and for you to understand the reasons why. 

There’s no denying the world of finance is full of jargon and seemingly complicated language. To help get you started, below are some of the most common financial terms people ask us about.

Loan to Value Ratio (LVR): LVR is the percentage of the property’s value (as assessed by the lender) that your loan equates to. For example, if the property you want to purchase is valued at $500,000, and you need to borrow $400,000 to pay for it, the loan is worth 80% of the property value, making your LVR 80%. 

Lenders Mortgage Insurance (LMI): LMI is insurance that protects the bank or lender in case you can’t pay your residential mortgage. It’s usually paid by borrowers who have an LVR higher than 80% – that is, borrowers with a deposit of less than 20%. 

Offset account: an offset account is just like a regular transaction account, except it’s linked to your home loan. The money held in the account is counted as if it’s been paid off your home loan, which reduces the balance of the loan and in turn, reduces the interest you need to pay. And because the offset account acts like a regular transaction account, the money you’ve put in there is still accessible whenever you need it. 

Refinancing: refinancing is the process of switching your home loan to take advantage of another, for instance there may be a more suitable home loan for your present circumstances, such as one with a lower interest rate that might save you money. 

Have you come across any other finance terms you’d like explained? 

If you’re keen to buy your next home but find all the terminology a bit daunting, then please reach out to us today. We’re always happy to sit down and demystify the home buying process, so that when you do take the leap into ownership, you can be confident that you’re armed with all the knowledge you need. 

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