We asked our team of brokers to break down some of the most common (and misunderstood) terms you’ll hear when applying for a home loan.
Liabilities refer to formal ongoing obligations, such as a personal loans and HECS debt, which are separate to day-to-day expenses. Liabilities go on your Veda report (what lenders use to assess your credit application and determine risk) and reduce your credit score which reduces your approval chances.
2. Assessment rates
An Assessment Rate is the interest rate used when the lender is assessing the serviceability of your loan (your borrowing power). It is generally higher than the rate of the product you are applying for. For example, if the product’s interest rate is 5%, they may assess you on your ability to pay off the loan if the rate is at 7% (the higher rate is the assessment rate), which helps manage risk.
3. Fixed and variable rates
A fixed rate is a set interest rate for a determined period of time, usually between 1-5 years. Variable rates refer to loan products that have fluctuating interest rates. Fixed rates typically don’t have as many features attached to them such as offset accounts. When the RBA puts the cash rate up or down, lenders often increase or decrease their variable interest rates in line with the cash rate.
4. Living expenses
One of the big contributing factors in how much a bank will lend you to buy a home, is living expenses. Your broker (and lender) needs to know what you spend each week on groceries, takeaway, coffee, gym memberships and phone bills, for example, so they can subtract that from your earnings and work out how much you can safely afford to pay back.
5. Credit enquiries
A credit enquiry is applying for finance of any sort, e.g. a mortgage, credit card or personal loan. Most lenders do not like to see more than 6 credit enquiries within a 12-month period as each one can reduce your approval chances.
Lenders Mortgage Insurance (LMI) is an upfront charge you pay when borrowing over 80% of a property’s purchase price. It is an insurance policy paid by the borrower which covers the lender. People often hear that they can get a home loan with only a 5% deposit, however they are unaware of LMI which is an added cost that should be taken into account.
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