When purchasing your first home, the terminology can sometimes feel overwhelming, almost like learning a new language. We’ve simplified things for you by breaking down some of the key terms you’ll encounter during the process.
Minimum Deposit
To qualify for a home loan, most lenders require a minimum deposit of 20% of the property’s purchase price. For instance, if you're purchasing a property worth $480,000, you would need to provide $96,000 upfront. However, if you’re a first-time home buyer, this deposit requirement can often be lower. Property developers may also require a deposit of 10% or less to secure your chosen property.
Lenders Mortgage Insurance (LMI)
Lenders Mortgage Insurance (LMI) is a safety net for the lender, protecting them from financial loss if you’re unable to keep up with your mortgage payments. If your loan defaults and the property is sold for less than the loan amount, LMI covers the shortfall. Lenders typically require this insurance if you're borrowing more than 80% of the property’s value.
Stamp Duty
Stamp duty is a tax levied by state and territory governments on property transactions. This is an additional cost on top of your purchase price. How much stamp duty you’ll pay depends on factors like the property’s value, its location, and whether you're a first-time buyer.
Conveyancing and Legal Fees
Conveyancing refers to the legal work required to transfer property ownership. You’ll need to hire a settlement agent, conveyancer, or lawyer to handle the preparation, signing, and filing of legal documents. These professionals ensure that the transaction is legally valid and properly processed.
Variable Rate Home Loan
A variable rate home loan features interest rates that fluctuate over time. These types of loans offer greater flexibility compared to fixed-rate options. For example, they often allow you to make extra repayments to pay off your loan faster and access those funds later through a redraw facility. Some loans also come with an offset account, helping you reduce the amount of interest you pay.
On the downside, because interest rates can go up or down, your repayments may increase unexpectedly. It’s important to assess whether you could manage higher repayments if rates were to rise.
Fixed Rate Home Loan
With a fixed rate home loan, your interest rate—and therefore your repayments—remains consistent for a set period, making it easier to budget. You can usually lock in a fixed rate for up to 10 years, depending on the lender. After the fixed term ends, your loan typically reverts to a variable rate unless you choose to fix it again.
Both variable and fixed-rate home loans have their advantages, and selecting the right one depends on your financial situation and future plans.
By understanding these common terms, you’ll be better equipped to navigate the home-buying process with confidence.
