How to interpret the language of finance
ARE you worried to talk finance because you do not know the lingo?
Occasionally I receive a call from a new client seeking their first home loan and they do not sound super confident.
To be honest, in this industry, we do have some of our own lingo, so today I will try to explain some of the most common ones. LOAN to Value Ratio — LVR. This is the amount of money you can borrow as a percentage of the property value. So if you want to borrow $300,000 (sometimes referred to as the principal) to buy a property worth $450,000, then the LVR for that loan is 66 per cent. Banks and other lenders on a residential loan will lend up to 80 per cent of the property value. If you want to borrow more than 80 per cent then they will require you to have Lenders Mortgage Insurance or a family Guarantee. LENDERS Mortgage Insurance — LMI. This is a one-off insurance payment you pay to protect your lender in the situation you cannot pay your loan, the insurance policy protects the lender from the loss, it does not protect you, the borrower. FAMILY Guarantee — This allows a family member to offer their property as additional security to your loan, and therefore not have to pay LMI.
There are generally two ways to structure the repayments of your loan; PRINCIPAL and Interest — P&I. This is where in your repayments you pay the lender the interest you have been charged and some of the borrowed amount, the principal. When you make P&I repayments with a loan term of say 30 years, at the end of that time you will have fully paid off your loan. INTEREST Only — IO. In this case this is where you only pay the interest charges on the loan, if you have, say, a twoyear IO period on your loan this means that after two years you will owe the same amount. IO is rarely available on your home loan, and has been limited by a number of lenders for investment properties in recent months.
Any good mortgage broker or banker will be more than happy to spend some time with you and explain the process and language of getting a home loan, so do not be worried pick up the phone and start your journey to home ownership.