4 in 5 would-be buyers still in the dark about mortgage terms

By Gerv Tacadena

Around four in five Australians who have yet to enter the housing market still have limited knowledge about financial products and terminologies such as home loans, interest rates, and deposits, according to the latest study by UBank.

Over half of those surveyed said they have "little to no knowledge" about loan-to-value ratios while close to half said they do not know what lenders mortgage insurance do.

Furthermore, roughly one in three said they have limited knowledge about offset accounts and negative gearing. There are also one in four who said do not have the understanding about comparison rates.

Philippa Watson, CEO of UBank, said there is a clear knowledge gap among the younger generations, and it is crucial to address this especially as appetite for homeownership continues to grow.

"Knowledge is key and entering the property market with little to no knowledge of some essential financial terms and concepts could see Australians falling into common traps or getting themselves into situations they cannot manage," she said.

"One of the ways we can help them is to debunk the very common misconception that finance has to be complicated, because we truly believe every Australian should have the ability to understand and manage their finances."

According to UBank, here are some of the mortgage terms every would-be buyer and borrower should know:

  • Loan to Value Ratio (LVR): A percentage showing the ratio of the borrowed amount to the value of the property. It is commonly used by lenders to assess the risk of a home loan for the bank. So, if you have a 20 per cent deposit, the LVR will be 80 per cent.
  • Lenders Mortgage Insurance (LMI): A fee some banks and other finance lenders charge borrowers to protect the bank in case a customer is unable to repay a loan. LMI is usually charged when customers have a lower deposit than the bank would ideally like.  Often LMI applies when a customer has less than a twenty per cent deposit. UBank waives LMI for their 85% LVR home loans.
  • Offset Account: An offset account is just like an everyday bank account; except it is linked to your home loan. The balance held in the account is counted as if it is been paid off your home loan, which reduces the balance and in turn, the interest you need to pay. This can reduce the overall term of the loan.
  • Negative Gearing: The practice of investing borrowed money in such a way as to allow any loss resulting from that investment to be claimed as a tax deduction.
  • Comparison rates: Comparison rates assist in calculating the true cost of a home loan. It combines the interest rate/s on your loan, plus a number of the fees and charges you can expect to pay across the lifetime of your loan. This single number can be compared to other lenders to make it as easy as possible to work out the how much a loan will really cost you.
  • Refinancing: Essentially trading your old home loan for a new one, and possibly a new balance. When you refinance your mortgage, your bank or lender pays off your old home loan with the new one; this is the reason for the term refinancing.

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