A mortgage is legal terminology for a home loan. It’s a legal agreement that gives your lender the title to your home in return for lending you the money you need to buy it. The property acts as collateral (i.e. security) for the lender in case you’re unable to make your future repayments. In that situation, they’re legally entitled to sell your home to recover any outstanding debt. However, once you’ve repaid the debt, the lender’s legal title to your home becomes void. You become the legal owner at that point.

LVR is an acronym for loan-to-value ratio. An LVR for a home loan is the proportion of money you need to borrow expressed as a percentage of the value of the home you want to buy. The ratio is calculated by dividing your home loan amount by the market value of the home. For example:

• If you want to buy a home valued at $700,000 and you have a deposit of $140,000, you would need to borrow $560,000.
• The loan-to-value ratio would be 80% here (i.e. $560,000 divided by $700,000)

Different lenders have different policies for the maximum loan-to-value ratio they’re prepared to accept. The higher the loan-to value ratio, the greater the risk to the lender of providing you with the loan. Usually, the higher the LVR, the higher interest rate the lender will charge for your home loan. This is to offset the greater risk to the lender.

In some instances, a lender will refuse your application due to you applying for a LVR that is too high for their risk appetite. The benefit of using a broker such as ourselves is that we have a breadth of experience and knowledge as to what will be deemed acceptable to various lenders - saving you from wasting time applying with a lender who is unlikely to look favourably on your scenario. It is also important to note that under Australian legislation, lenders have a legal obligation to lend responsibly (i.e. to only lend to borrowers who they are satisfied will be able to afford their loan repayments) - meaning that in some circumstances, you may need to consider your options in order to bring down the total LVR of your lending.

If your home loan application exceeds the lender’s maximum LVR, you have three basic options:

• Try and come up with a larger deposit to bring the loan-to-value ratio down to a level that’s acceptable to the lender.
• Have a relative or friend that is acceptable to the lender act as guarantor for your home loan. The guarantor would need to agree to be legally responsible for your home loan debt if you’re unable to make your repayments. This can be a risky situation for the guarantor to be in if property prices were to fall while the amount owing on the home loan was still very high.
• Apply to another lender with a higher loan-to-value ratio. However, you’ll likely have to pay a higher interest rate to compensate that lender for the increased risk of your high LVR. As mentioned, we are able to assist in identifying the right lender for your circumstance, so feel free to get in touch.

LMI is an acronym for lenders mortgage insurance. Mortgage insurance protects the lender if you default on your repayments in the future. Whether your lender will require you to take out mortgage insurance depends on their lending policies. As a general rule, the higher the LVR, the more likely it is you will be required to take out LMI to offset the lender’s increased risk.

The policies of different lenders vary, but many will require you to take out mortgage insurance if your loan-to-value ratio exceeds 80%. The premium for this mortgage insurance is then an additional cost for you as the home loan borrower.

‘Genuine savings’ is a term used by lenders to assess the amount you have saved over time. They need to see that you have planned and saved for the deposit yourself (e.g. that you haven’t received as a gift, inheritance or buy way of a first home owner’s grant scheme offered by a government). This also demonstrates your ability to save and budget, thus providing the lender with an indication of your potential credit risk, which affects whether they’ll be prepared to accept your home loan application under the responsible lending provisions of Australian credit law.

Different lenders have different genuine savings policies. The higher your LVR, the more evidence of your genuine savings your lender will need. Generally, most lenders will want to see evidence of genuine savings of at least 5% of the purchase price of your home if your LVR exceeds 80%. Conversely, if your LVR is lower than 80%, you probably won’t need to provide evidence of your genuine savings ability.

Examples of genuine savings include:

• Savings accounts held for at least three months.
• Term deposits held for at least three months
• Shares that you have bought at least three months ago and still currently own.
• Some lenders will also accept a long-term (i.e. at least 6 months) satisfactory rental history as evidence of your ability to save and budget.

Should you choose a fixed or variable interest rate? This is a question most borrowers wrestle with when deciding on a home loan. There are pros and cons of both types of interest rates.

A fixed home loan interest rate stays the same for a defined period, usually 1-5 years. At the end of the fixed term, you may have the option to choose another fixed term or the loan may automatically convert to the lender’s current variable rate.

Pros of a fixed rate:

• If variable interest rates go up, fixed rates don’t. Your repayments won’t change and you’ll be paying less interest than a person with a variable rate. For example, imagine if you had a home loan of $400,000 at a fixed rate of 5%, and that variable interest rates increased to 6%. You’ll be charged up to $4,000 less interest over the course of a year.
• You can budget with more confidence knowing that your home loan repayments won’t change until the fixed term expires. This can be especially useful at certain times of your life (e.g. when starting a family).

Cons of a fixed rate:

• If variable interest rates go down, fixed rates don’t. You’ll be paying more interest than a person on the variable rate. For example, imagine if you had a home loan of $400,000 at a fixed rate of 5%, and that variable interest rates dropped to 4%. You’ll be charged up to $4,000 more interest over the course of a year.
• They usually have higher fees than a variable rate loan.
• If you want to change your loan before the fixed interest rate period expires (e.g. to change to a lower variable rate or sell your home), there will usually be fixed term ‘break’ fees involved.
• Some fixed interest rate loans limit your ability to make additional repayments (or they charge fees for allowing it), and you may not have additional features such as a redraw facility.

Conversely to a fixed rate, a variable home loan interest rate can fluctuate with market and economic conditions.

Pros of a variable rate:

• If variable interest rates go down, fixed rates don’t. You’ll be paying less interest than a person on the fixed rate.
• Variable rate home loans typically have more features than a fixed rate loan (e.g. the ability to make extra repayments, a redraw facility, an offset account or a line of credit). These may be useful features for you to have if your circumstances change.
• It’s easier to switch variable rates loans if you find a better deal, and there are usually less switching fees.
• They usually have lower fees overall than a fixed rate loan.

Cons of a variable rate:

• If variable interest rates go up, fixed rates don’t. Your repayments will increase because you’ll be paying more interest than a person on the fixed rate.
• Budgeting will be less certain and you’ll have more potential for mortgage stress.

There is also a compromise alternative - splitting your loan. This is covered in the next question on this page.

A split loan allows you to hedge your bets, by having part of your loan locked at a fixed interest rate and the remainder at a variable rate. You have the pros (and cons) of both fixed and variable interest rates, instead of having ‘all your eggs in one basket’.

You can usually decide the loan split proportions (e.g. 50/50, 60/40, 70/30 etc.). This provides you with the benefits of a variable rate on part of your home loan (e.g. the ability to make extra repayments, or link an offset account), while reducing your exposure to interest rate rises (because you fix your interest rate on part of your loan). Essentially, split loans allow you to have some flexibility, with some security.

Lenders typically have two interest rates for their home loans – an advertised rate and a comparison rate. The advertised rate is lower, but the higher comparison rate is intended to reflect the true cost of the loan because it includes the cost of any associated home loan fees and charges. The advertised rate does not do so.

One important caveat to note is that comparison rates for fixed loans consider the cost of the loan over the entire term of the loan (usually 30 years). After the fixed term expires, the loan will revert to a variable rate that is usually not very competitive. In many cases, people will often seek to refinance or re-fix their loans after the fixed term expires, meaning that the comparison rate might not be the best way to evaluate if the loan is right for your circumstance.

The home loan market is competitive and lenders typically offer a variety of home loan types to cater for different needs. The interest rate on a home loan is obviously an important consideration, but it shouldn’t be your only one, nor should you look at it in isolation from other loan features.

For example:

• If a loan has a very low advertised interest rate, it’s possible that it will have higher associated fees. This is where it’s important to consider the comparison interest rate (which lenders are legally required to display beside any advertised rate).
• On the other hand, a loan with a higher interest rate or associated fees may have a lot of flexible features attached to it. These features may (or may not) be beneficial for your situation, either now or in the future.

It’s important to consider a home loan as a package of features and to choose the one that is most appropriate for your circumstances. Ideally, a home loan needs to be flexible because your situation may change over the long term.

For example, some lenders may offer any or all the following features that may be beneficial for you:

• Portability. This allows you to transfer your loan from one property to another if you move before you pay off your mortgage.
• The ability to make extra repayments.
• A redraw facility. This allows you to withdraw any additional payments you make at a later stage if you need to.
• The ability to split the loan between fixed and variable rates of interest.

A basic (or no frills) home loan has fewer features and less flexibility. In return, you gain the benefits of a lower interest rate and reduced (or no) application or ongoing fees. Basic loans aren’t suitable for everyone, because many people need the flexibility that additional loan features offer if their circumstances change over time.

No frills loans are best suited to people who:

• Take out smaller home loans over shorter periods
• Want simplicity.
• Are unlikely to need additional loan features.
• Are unlikely to want to switch lenders.

An offset account is separate to your home loan but instead of earning interest, it effectively cancels out the interest charged on the equivalent value for the linked loan amount.

For example, if you have a variable interest rate loan of $500,000 and $100,000 in a linked offset account, instead of paying interest on the full $500,000, you would only be charged interest on $400,000. ($500,000 minus $100,000).

This is a good way of reducing your home loan interest rate bill without actually repaying the loan. It means that your funds are still available for you to access, while saving you on your interest payments.

It's important to keep in mind that offset accounts are usually not available on fixed term loan products.