More than half of Victorians are disgruntled by the traditional mortgage industry and frustrated by difficult jargon and hidden fees.
It’s incredibly important for home loan applicants to get their finances in order to compete with other budding buyers in the current high-demand market.
About 70 per cent of Victorians say confusing financial lingo is a key barrier to homeownership and refinancing, according to new research from digital home loan company Nano.
The data reveals 44 per cent think it involves too much paperwork, while 26 per cent also noted the slow processes of obtaining a mortgage.
Nano co-founder and chief executive officer Andrew Walker said consumers had become increasingly disenchanted with the industry’s red tape, unclear pricing and confusing forms.
“Traditional lenders can charge customers a range of hidden fees such as application and usage fees, among many others,” Mr Walker said.
“The use of pricing gimmicks such as cashbacks and honeymoon rates (are also common), which can make it difficult for customers to understand the true cost of their loan.”
He said mortgage customers should ignore “the shiny headline rate that is dangled out there to entice customers” and focus on the comparison rate of any given home loan to gauge the most accurate cost.
To help simplify the process, here’s every definition you need to know before you navigate the home lending process.
Your lender may charge you daily, monthly or annual account keeping fees to manage your home loan account.
Cashbacks are one common incentive lenders will offer to potential customers looking to refinance their loan. Once you complete your loan application and accept the funds, you’ll get a one-time cashback from the lender. Often there will be hidden fees over the life of your loan to allow the lender to recoup this ‘free’ money. A note that if it looks too good to be true, it probably is.
The comparison rate is designed to represent the most accurate rate you will be charged for your home over a 12-month period as it includes all fees and charges relating to your loan. If your lender is not charging any fees, the comparison rate should be the same as the advertised interest rate.
Also known as ‘approval in principle’, this is confirmation from a lender that they would be willing to lend you a certain sum for your loan, pending some final assessments. A conditional approval is just that, conditional, meaning it is subject to certain conditions before being fully approved. Generally, conditional approval on a loan is valid for up to three months.
This is a fee your lender may charge you if you pay off your loan in full early, or decide to refinance the loan (completing a mortgage is known as discharging). Discharge fees or other ‘break’ costs are common when choosing to end a fixed-term loan.
‘Debt service ratio’ is essentially a way for a lender to calculate your ability to pay off your loan. It’s a percentage figure that is calculated based on the amount of your income that will need to go towards paying back a loan.
ESTABLISHMENT OR APPLICATION FEE:
This is a fee your lender may charge you to set up or complete the application process for your home loan.
This is a set rate for a certain term, most commonly up to a third of the loan term. The majority of borrowers choose to fix a certain amount of their loan, not the entire amount. While fixed-rate loans can seem enticing to borrowers in periods of volatile interest rates, most fixed-rate agreements come with higher exit fees, which can leave you paying more than the market in some situations.
A honeymoon rate is an introductory rate or offer designed to entice customers, however it will not last forever, with the lower rate payments usually only lasting 6–12 months before the rate reverts to a higher rate. It’s a gimmick that consumers should consider carefully alongside the comparison rate.
Standing for ‘lenders mortgage insurance’, this is an insurance policy that protects the lender if you were to default on your loan repayments. Generally, if you are borrowing more than 80 per cent of the value of the property, your lender will ask you to secure this policy as a condition of your loan being approved. This is an extra cost on top of your monthly repayments. An LMI can also be called an MRF ‘mortgage risk fee’ or LPR lender protection fee’.
Not strictly a tax per se, this is actually a common terminology used in the industry to describe the inherent loss of value borrowers experience when staying with their original lender long term. It’s commonplace for traditional lenders to offer sales promotions and more competitive interest rates to new applicants, as a means of enticing them to sign up, but rarely are these more competitive offers extended to existing customers. By staying with your lender and not considering refinancing options, you could be paying loyalty tax.
This is a separate account where you can house your savings, which will help to reduce the interest charged on your loan. Moving your money into an offset account is a great way to save, while also getting ahead on your mortgage.
Having a redraw facility within your home loan gives you the opportunity to make extra loan repayments over and above the stated minimum requirements, allowing you to pay off your loan faster and thereby incurring less interest. Most lenders will have limits on how much you can hold in a redraw account and, in some cases, how many redraws you can request over a certain period of time, whether monthly or annually.
Refinancing is effectively replacing your current lender with a new one, by applying for a new loan to repay your outstanding amount owing straight away, and beginning a new loan agreement with an alternative lender. Switching lenders can help you secure a lower interest rate, lower fees or extra features such as an offset account.
This is a fee your lender may charge as part of the application process, where a lender will require a professional valuer to inspect and assess the property to determine its value.
A variable rate changes with the market, so if your lender changes your loan’s interest rate, your repayments will also change. This is great when rates are low, however you need to plan for potential rises.
Originally published by Christina Karras, 13 May 2021, Realestate.com.au https://www.realestate.com.au/news/home-loan-mortgage-terms-to-know-to-avoid-extra-costs/