Five common property finance terms explained

BY DANIEL WALSH AND LEIGH DELEDIO

Navigating the world of property finance can be daunting, with its web of terminology and jargon, often leaving even seasoned buyers and sellers scratching their heads.

However, arming yourself with knowledge before diving in can significantly enhance your chances of long-term success. Here are some key terms to understand.

Cash rate

The cash rate acts as a benchmark for setting interest rates on home loans and savings accounts. It represents the rate at which banks lend or borrow money from each other on an overnight basis. Set monthly by the Reserve Bank of Australia board, lowering the cash rate aims to stimulate borrowing and economic activity, while raising it helps control inflation by increasing borrowing costs.

Loan-to-Value Ratio (LVR)

This ratio compares the size of the loan to the value of the property and is expressed as a percentage. A lower LVR, such as 60 or 70 per cent, is less risky for lenders as it indicates a smaller loan amount relative to the property value. Higher LVRs, typically above 80 per cent, may require lenders mortgage insurance (LMI) to protect the lender against default.

Lenders Mortgage Insurance (LMI)

LMI safeguards lenders in case of borrower default and subsequent shortfall in property value after sale. It is a one-time payment, usually required for loans with an LVR above 80 per cent. LMI costs vary based on factors like loan size and LVR, with borrowers often opting to pay it to enter the property market sooner.

Home loan pre-approval

Pre-approval, or conditional approval, offers borrowers a tentative indication of the loan amount a lender may provide, subject to conditions like property valuation and financial verification. It empowers buyers with a spending limit and confidence to pursue properties within a specific price range.

Offset account

An offset account links to a home loan, reducing interest payable on the loan balance. Funds in the offset account offset the loan amount, reducing interest charges. While no interest is earned on the offset account balance, it enhances cash flow and accelerates savings accumulation. Offset accounts offer flexibility akin to transaction accounts, without redraw limits or fees.

Understanding these terms equips buyers and sellers with the knowledge necessary to navigate property finance effectively and make informed decisions in their real estate endeavours.

Are you in the market for a new home, or looking to refinance? Chat to a local UFinancial mortgage broker today.

For more information, head to ufinancial.com.au or scan the QR code.