Terms you need to know when buying your first home
13 May 2019
First homebuyers struggle to understand some of the most basic property purchasing terms. According to a study of 1,000 Australians looking to purchase their first property, 61% of first home buyers failed when given a basic property literacy test.
Without knowing the basic terms, you could be caught out with unexpected costs and extra stress. Let’s clear up some of the confusion around some of the most basic terms you need to know when you purchase your first home – after all, a house may end up being the biggest investment of your life.
Lenders’ Mortgage Insurance (LMI)
Many people get confused about LMI, with 88% of respondents to the ME Bank survey thinking LMI covered the borrower, not the lender.
When you have a deposit of less than 20% of the cost of the property, you will need to pay LMI. The insurance acts as a ‘security’ to the lender, because those borrowers with less than a 20% deposit are considered ‘high risk’ borrowers.
The LMI fee is a percentage of your mortgage that is generally added to the home loan - so you don’t pay it upfront. It can be thousands of dollars, and varies widely depending on the amount of the loan, the value of the property, and the lender. LMI is one reason it’s generally better to have a higher deposit of 20% of the cost of the property.
TIP: Ensure you get a number of quotes for LMI before you commit to one lender. It can vary by as much as $5000 for the same mortgage!
You will need to pay a deposit on auction day. A staggering 78% of respondents didn’t realise they had to have the deposit ready on auction day. Once you successfully bid for a property at auction and sign the contract, you must pay the specified deposit amount. At auction, there is no cooling off period. The payment method will depend on the terms and conditions set by the selling agent so make sure you check before auction day and be prepared.
Sixty-six per cent of first home buyers didn’t know what the term ‘conveyancing’ meant. Conveyancing is the transfer of ownership of a property from a seller to a buyer. When you purchase a property, you need to engage a legal practitioner or conveyancer to review your legal documentation, such as the contract of sale and the transfer of title.
The benefits of an offset account
Sixty-three per cent of respondents to the survey didn’t know what an offset account is – but an offset account linked to your home loan could also save you thousands of dollars in interest. Put simply, it’s a bank account linked to your home loan that is offset daily against your home loan balance. As a result, you’re only charged interest on the difference between the two. Ultimately, the lender charges you less in interest because they aren’t charging you interest on the full, actual remaining balance of your loan.