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The language of lending

The language of lending

16 Jul 2015

As a lender I like to start off my appointments with a customer checking their comfort level with banking terminology. The last thing I want to do is get half way through a discussion and realise I'm not making sense because of the words I'm using.

Here's a break down of the most common terms you'll come across.

Comparison rate. A comparison rate helps you know what the true cost of a loan is when comparing rates with other banks. It does this by factoring in applicable fees and charges as well as standard interest rates.

Variable rate. A variable rate is one that changes, mostly in response to external factors, like when the Reserve Bank of Australia changes the official cash rate. It can go up or down depending on whether the bank lowers or raises interest rates. This gives you flexibility and it is often the lowest available rate, but it’s wise to factor in increases in payments.

Fixed rate. A fixed interest rate does not fluctuate during the period of the loan that is fixed. Our fixed rate products are for one, two or three year periods. This means you can predict your payments for the duration of the fixed rate period but if the market changes and rates go down, your repayments will not.

Redraw. Our home loans allow you to redraw any additional funds that you’ve paid in advance. There’s generally a limit on the extra repayments that you can make on fixed home loans and in most cases redrawing does not apply to interest only and bridging loans. Depending on your loan, there may be fees or a minimum amount associated with your redraw – so check your contract. For convenience, you can organise redraws on your home loan through internet banking.

Loan to value ratio (LVR). Sometimes you hear lenders or brokers talking about LVR – this is the ratio between the amount you are wanting to borrow and the value of the property you’re purchasing. It is used to determine if you need to pay Lenders Mortgage Insurance. The highest LVR we lend to is 95%.

Lender's Mortgage Insurance (LMI). If you borrow more than 80 per cent of a property’s purchase price (above 80% LVR), you will need to pay insurance on the loan to protect the bank in case you default on the loan. How much LMI you pay depends on how much money you borrow and your location.

Mortgage Offset. The offset account complements your home loan. Any funds deposited in a 100% Mortgage Offset account are deducted from your home loan balance prior to calculating your interest expense each month.

There's some excellent information to assist with better understanding the language of lending. Check moneysmart.gov.au/glossary/a