It is important for you to know what you are signing up for so we are here to translate the jargon and the small print. Here are some of the more common questions our clients ask:
Please note that all definitions below are general & should not be considered as advice. You should speak to Clear Options Finance for the advice on the best options for your specific circumstances.
What are P&I, IO, Var & FI loans?
Principal & Interest is a loan where you pay down the “principal” (the amount that you borrowed) & the interest over a period of time (usually 15 to 30 years). This is the most common loan type for an owner occupier loan.
Interest Only is often used by Investors. This is where only the interest is paid over the period of the loan & the principal remains the same so you will never pay off the loan. The logic for this structure is that the borrower wants to reduce their monthly payments & rely on the increasing capital value of the property over time for profit upon sale.
Variable rate loans can increase or decrease over the life of the loan. They expose the borrower to upside risk if rates increase but also open the opportunity for savings should rates decrease.
Fixed Interest rate loans protect the borrower from increasing interest rates but also shield opportunities should rates decrease.
You can talk to us at Clear Options Finance about the best loan structure to suit your situation & projected market conditions.
What is LMI?
Lenders Mortgage Insurance is an insurance paid by the borrower to protect the lender in the case that you are unable to repay your loan.
It is also a tool that a borrower may use to qualify for a loan when they do not have the 20% deposit normally required by the lender. The premium varies depending on the lender & the amount of deposit a borrower has saved. As a guide, you should factor around 2% of the property value if you have 10% deposit (it’s about 1% if you have 15% deposit & rises to about 4% if you only have 5% deposit).
For example, on a $750,000 property if you have saved $75,000 (plus stamp duty of ~$30,000 in NSW) your premium will be +/- $15,000.
What is Mortgage Protection Insurance?
This is an insurance that a borrower can take to protect themselves in the scenario that that they are sick or lose their job so that mortgage payments can continue. There are many choices & it is important to read the fine print so that you understand the circumstances under which you will be insured but more importantly, understand the circumstances under which you will not be paid.
What does LVR mean?
The Loan to Value Ratio is the value of the loan compared to the value of the property. The standard LVR in Australia is 80% so in the example that a property is valued at $800,000 & the loan is $640,000 the LVR is 80%. If the loan is say $720,000 the LVR is 90% & LMI would be required to proceed.
What is an offset account?
An offset account is an account that is held with the same bank as your loan. It is linked to your loan account so that you can make extra payments on a variable rate loan to reduce your balance so you can pay your loan off faster. If you ever need the funds, they will be in your account, same as a normal savings account.
What is an equity redraw?
An equity redraw is for property owners who have accumulated equity in their property when the value of the property has increased over time & want to use that equity for other purposes; for example to renovate their existing home or to further invest in either property or other assets.
Why would I split my loan?
There are lots of reasons to split your loan, the most important being flexibility. In our current economic climate (January 2019) economists are divided in their opinions as to whether interest rates will remain static, decrease or increase over the coming 12 months. However, after 2.5 years with the RBA cash rate on hold at an historic low of 1.5% it is more likely than unlikely (with the caveat that no one has a crystal ball) that rates will go up rather than down in the coming years.
With this logic & with rates being so low it is prudent to consider:
a) locking in a portion of your loan to a fixed rate to protect against rising rates &
b) keep a portion variable so that you can make extra payment into your offset account if circumstances allow.
c) stay in contact with Clear Options Finance regarding rate forecasts & how this will effect your loan.