The Courier-Mail

Test of skill to un­der­stand word game

- AN­THONY KEANE

THE lan­guage of lend­ing would be funny if it wasn’t so con­fus­ing to many Aus­tralians.

Ba­sis points, com­par­i­son rates and LVRs are some of the terms that can trip up those think­ing about mort­gages and other loans.

Here’s moneysaver­HQ’s quick guide to some of the jar­gon regularly fired at bor­row­ers.

Cash rate: No, it’s not the in­ter­est rate you get paid on your cash in the bank. It’s the of­fi­cial in­ter­est rate, an overnight money mar­ket rate set by the Re­serve Bank which forms the base on which other in­ter­est rates are set. You can check out its history and more de­tails at rba.gov.au. Home loan in­ter­est rates are usu­ally a cou­ple of per­cent­age points higher than the cash rate.

Ba­sis point: This term has crept into fi­nance-speak about home loans in re­cent years. It may sound like a fancy term says com­par­i­son site RateCity spokesman Peter Arnold.

“But they’re just frac­tions of a per­cent­age point. Ten ba­sis points is equal to 0.1 per cent.”

LVR: The ini­tials stand for loan-to-value ra­tio, and it’s an im­por­tant num­ber when go­ing for a mort­gage. If a prop­erty is val­ued at $400,000 and the loan amount is $320,000, the LVR is 80 per cent – which is usu­ally the level that you have to pay costly lenders mort­gage in­sur­ance.

Lenders mort­gage in­sur­ance: Speak of the devil, LMI can cost you thou­sands of dol­lars but of­fers you zero per­sonal pro­tec­tion. Es­sen­tially you are pay­ing an in­sur­ance pre­mium to pro­tect the len­der from losses if you de­fault.

Com­par­i­son rates: Most of us know what vari­able rates and fixed rates are, although the com­par­i­son is not as easy to un­der­stand. It’s a rate that in­cludes most of the fees and charges payable on a loan as

Pic­ture: CATHY EARL well as the in­ter­est rate, aimed at pro­vid­ing a more ac­cu­rate fig­ure of the true cost to you.

Split loan: Do­ing the splits gives bor­row­ers an each-way bet, putting part of your home loan on a vari­able rate and the rest into a fixed rate.

Neg­a­tive gear­ing: Pop­u­lar among in­vestors, neg­a­tive gear­ing is when an in­vest­ment’s in­come does not cover the in­ter­est on the loan and other costs. The dif­fer­ence can be claimed as a tax de­duc­tion.

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