Test of skill to understand word game
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.