Learning mortgage lingo can really pay off

OFFSET accounts, redraw facilities, comparison rates and loan-to-value ratios are all common terms used in the mortgage industry.

But Australians are struggling to keep pace with financial language, and it could be hitting their hip pockets.

Signing up to a mortgage is often a person’s biggest lifetime expense and experts have urged borrowers to get a better understanding of the different terms that are used before signing on the dotted line.

Independent research compiled for Gateway Bank quizzed 1000 mortgage holders and found the nation’s financial literacy has dropped.

Of those surveyed, the portion of mortgage-holders who understood these terms was on the decline over the past year.

WHAT PEOPLE KNOW Term Understood by

Offset account ........................ 53% (down 3% on last year). Redraw facility ........................ 56% (down 4%) Difference between a comparison rate and interest rate ............... 31% (down 5%) Loan-to-value ratio ................. 26% (last year’s figure not available)

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Gateway Bank chief executive officer Paul Thomas said it was vital that all borrowers understood mortgage terms to ensure they had signed up to the best loan suited to their needs.

“People are sometimes afraid to ask basic questions for fear of looking silly,” he said.

“If you don’t understand a comparison rate or the benefits of an offset account, you are probably going to overpay.”

He warned customers to make sure they understood these terms to ensure they were on the right deal “that keeps money in your pocket and not the credit provider’s”.

Offset account:

A transaction account linked to your home loan that offsets interest costs. If you have a $300,000 mortgage and $10,000 in your offset account, you’ll pay interest on $290,000.

Redraw facility:

Extra repayments sit here and can be accessed or redrawn. It includes

Comparison rate:

Mr Thomas said an average Gateway customer had $38,000 in their offset account and the interest rate and fees and charges associated with the loan.

Interest rate:

The interest rate charged by the lender on the money owing.

Loan-to-value ratio:

The ratio of the mortgage compared to the property’s value. If your home is valued at $500,000 and your loan is $400,000, your LVR is 80 per cent. $11,881 in their redraw facility, which resulted in big savings.

Home Loan Experts managing director Otto Dargan said if borrowers failed to understand mortgage lingo, it could result in them setting up their financial matters in an ineffective way.

“Some people have an offset account yet have their spare funds in a term deposit,” he said.

“So they’re earning 2.5 per cent and paying tax on it when they could be saving 4 per cent.”

Mr Dargan urged those who did not understand any mortgage terms to ask their bank or mortgage broker.

“Realistically, if finance isn’t your strength, then you need to rely on an expert that you can trust,” he said.