Understanding home loans

By Heidi Armstrong

Q. There’s so much loan jargon out there that I don’t understand. Can you clear the air for me?

A. There are many terms used with loans that are not commonly understood. Here are a couple:

Serviceability: A measure of your ability to be able to keep up with the loan repayments. This is based on your established income and a reasonable estimate of your expenses.

While each financial institution will have its own set of formulas, you can easily work out whether your serviceability is adequate for a given loan by going to quickquote.statecustodians.com.au.

LVR: Loan to Value Ratio.  Work this out by dividing the amount of the loan by the value of the property used as security.   Work out all of the costs involved in the purchase, subtract the amount that you have available as a deposit and that will let you know how much you need to borrow.
You will then need to know the value of the property.  That’s not necessarily what you paid for it and, if you are presently involved in buying a property, it certainly will not be more than the purchase price.  The lender will need to base it on a valuation by an approved valuer on their panel of lenders.
The LVR is important because if it is over 80% you may need to pay LMI (see next paragraph!).  There will also be a maximum LVR allowed for a given loan.  Usually that’s around 95%.

LMI: Lender’s Mortgage Insurance.  The lender needs to be protected in case something happens where you cannot repay the loan and the property value goes down to where a forced sale cannot cover all the costs.  Naturally, if you have borrowed a smaller portion of the property value, it’s less likely that there could be a problem.  But if you have borrowed 95% of the property value, it wouldn’t take too much of a dip in the property market to get you in serious trouble!

Just because the loan is insured doesn’t mean that you are off scot-free.  If you default they could sell the home to repay the debt and come after you for anything lacking.

Given those sorts of consequences it makes sense for you to get your own insurances in place that will enable you to either repay the loan or cover the ongoing loan repayments should something happen to you.  

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