Most people purchasing a property will need to borrow money from a financial institution to do so, usually a bank, building society, or credit union – and in the process you will fill in reams of paperwork and come across a variety of terms you may not be familiar with, like LVR, for example – it can feel like another language!
Below is a list of terms with a simple explanation of what they mean.
LVR – Loan to Value Ratio
It basically states the percentage of the loan in relation to the valuation of the property in question. The standard LVR to avoid having to pay lenders mortgage insurance (LMI) is 80 percent, which means the bank will loan approved applicants 80 percent of the value of the property. This means you need to contribute the remaining 20 percent of the value of the property plus other costs associated with the purchase.
In other words, you (generally) need a 20 percent deposit plus other associated costs (such as stamp duty and legal fees). It’s important to note that not all lenders require an 80 percent LVR to avoid LMI – this varies from bank to bank.
Fixed rates are set by your financial institution and cover a designated time period, they are generally higher than the variable rate, but not always. The advantage of fixed rates is it gives you certainty about what your loan repayments will be and the total interest you will pay over the fixed term period of your loan. This is a good option if you don’t have plans for big changes during the period you ‘fix’ for or if certainty is important to you. Put simply, this means you can lock in your repayments and confidently plan for the future.
Unlike fixed rates (above), variable rates can go up and down depending on the Reserve Bank of Australia and other variables. This might make it cheaper sometimes and more expensive at other times. This might have other advantages, such as being able to make additional repayments as you can afford them (and redrawing these extra payments as necessary). Translated, this means you can pay off your loan sooner with more flexibility.
Conditional approval, or pre-approval, means the lender has assessed you and your suitability as a borrower and is happy to loan to you, subject to completing their verification process. This is conditional on the bank’s assessment that the property you select is suitable and verification of the information in your application.
Full approval combines the bank’s assessment and verification of you and your property. In plain English, this means it’s time to start looking for your first (or next) property.