The stars have aligned for first home buyers, with the abolishment of stamp duty in the ACT, interest rates at less than 1% and the Federal Government’s ‘first home super saver’ scheme, now has never been a more opportunistic time for first home buyers to enter the property market.
We’ve put together a list of key words that first home buyers might have never come across before, but should know and understand to get started on their buying journey.
Stamp duty is a government-imposed tax on large transactions such real estate, motor vehicles and assets. As of 1 July 2019, first home buyers in the ACT, aged 18 and above, are eligible for the stamp duty exemption scheme.
This scheme applies to vacant residential land, both new and established homes, located anywhere within the ACT and at any price. There are limited exceptions to this scheme, but the main eligibility criteria that the total gross income for all buyers, including their partners, must not exceed $160,000. It is important to never make assumptions on eligibility; it is highly recommended to speak to your broker to confirm if you can take advantage of the scheme.
Principal and Interest Repayments (P&I)
Principal and interest (P&I) is a type of loan repayment. Principal is the amount of money you have loaned from the bank (which decreases as your make repayments). Interest is the money charged on top of your base loan amount and is calculated based on your loan’s interest rate and the principal amount.
Interest only Repayments
Interest only repayments are a short-term repayment option (1-5 years), which allows the borrower to only pay off the interest component instead of reducing their loan amount.
After the interest only period expires, the loan repayment schedule will automatically switch to P&I.
An offset account is a bank account which goes hand in hand with your home loan repayments. Basically, what an offset account does is counterbalances or ‘offsets’ the money in your offset account against the interest component of your loan repayments.
Essentially, it is better to have as much money in your offset account to reduce the amount of interest you pay over the life of your loan.
Sound a bit confusing? Let’s break it down:
Let’s say you have a home or investment loan of: $400,000
and you had $25,000 of savings sitting in your offset account
You would on pay interest on $375,000
Types of Approvals
There are two types of approval when seeking finance for a home loan.
The first is pre-approval and the second is formal approval.
What is pre-approval?
Pre-approval or conditional approval is approval for a loan prior to actually purchasing a property. Pre-approval not only allows you to understand how much you can obtain a loan for, but also allows you to comfortably house hunt and place an offer or bid on your potential future home.
Conditions associated with pre-approval:
– Pre-approval expires after 3 months for most lenders. You will need to renew your pre-approval application if you haven’t found a property within the 3-month timeframe.
– You are not guaranteed a home loan. Lenders will still need to review your credit history, financials, employment and living expenses to determine if you meet their serviceability criteria.
What is formal approval?
Formal approval or unconditional approval, is when the lender formally approves your loan application, guaranteeing you finance on the property you have successfully placed an offer on.
Loan-to-value ratio (LVR) and Lenders Mortgage Insurance (LMI)
When you visit your broker, you more than likely will hear them talking about your LVR.
An LVR is your ‘loan-to-value ratio’ which is a calculation of the amount of money you
are looking to borrow as a ratio to the value of the property. The higher the LVR, the greater risk you are to a bank, any LVR that is 80% or lower is deemed as normal reasonable risk.
Hypothetically speaking, if the property you are looking at purchasing is $500,000 and you are looking to borrow $400,000 from the bank, your LVR is 80%.
($400,000 loan divided by $500,000 property value) x 100 = 80% LVR.
It is highly recommended that you save 20% of your total purchase price for a deposit. The reasoning behind this, is that by having an LVR that is more than 80% will incur a Lenders Mortgage Insurance (LMI) fee and you will also be considered a high-risk borrower.
Lender Mortgage Insurance (LMI) is an insurance that protects the lender, not the borrower, against a loss should you as the borrower default on your home loan.
If you’re looking to avoid LMI but haven’t saved up your deposit, it may be better off waiting to save up your deposit.
Your borrowing capacity is the amount a lender is prepared to lend you to buy a property. A broker or a lending institution will determine your borrowing capacity by taking into account your assets, liabilities, general living expenses, your employment type and your income. Your borrowing capacity calculation will ensure that you can comfortably repay your intended mortgage amount as well have additional funds left over for general living and property expenses.
An interest rate is the percentage of the principal loan amount, charged by the lender for them lending you money. The majority of lending institution rates are within close range to each other to remain competitive.
Your loan structure may either have a fixed or variable interest rate:
Fixed interest rate
A fixed interest rate is a loan where the interest charged by the lender is locked in for a specific amount of time (e.g 2 years). No matter what changes happen to market interest rates, your payments will remain the same over the fixed term period.
Variable interest rate
A variable interest rate is a loan where the interest charged by the lender is subject to change as market interest rates change. As a result, your repayments are subject to change depending on the interest rate going up or down