10 Sep 2019

The landscape of home loans and mortgages can quite simply be described as rough terrain at best, with even the savviest customers often coming unstuck with it’s terminology and definitions.

Here we have compiled the most common terms that are most likely to cause confusion and often stump mortgage holders whether they be on their first application or fifth.

  1. Mortgage vs Loan Contract

Whilst often used interchangeably, a mortgage and a home loan are two distinctly separate entities. A Mortgage can be described as a legal agreement by which the financial institution lends money in exchange for taking the title of the debtor’s property until the debt is repaid. A Loan Contract is the agreed terms and conditions as set out by the lender detailing the amount, interest payable, fees charges and term etc.

  1. Interest Rate vs Comparison Rate

The interest rate on a loan product is the rate, expressed as a percentage, a lender charges to borrow its money. Often appearing in the fine print underneath a home loan product, the Comparison Rate is a rate that is designed to help you determine the true cost of a loan by incorporating all the fees and charges into one single percentage figure. It is usually based on a $150K loan over 25 years.

  1. Credit Score vs Credit Report

Your credit score is a numerical expression based on the analysis of your credit history to represent credit worthiness. Many lenders credit score as part of the application process. A credit report is a report detailing an individual’s credit history and any credit blackspots that may be sourced from a credit reporting agency.

  1. Discharge of Mortgage vs Loan Closure

A mortgage discharge involves the removal of a mortgage instrument from the title of a property whereas a loan account closure occurs when the debt is repaid in full. A discharge of mortgage does not automatically occur once the loan is repaid, it must be applied to be released by the borrower via the lender after the debt is cleared.

  1. Genuine Savings vs Regular Savings

Each lender has their own definition of genuine savings, but it usually refers to 5% of the purchase price of the property being purchased held for at least three months by the applicant in a savings account. This does not include monetary gifts, inheritances, bonuses, tax refunds and other short-term cash savings that may be held in regular savings.

  1. Lenders Mortgage Insurance vs Loan Protection Insurance

Lender’s Mortgage Insurance (LMI) is payable by a borrower that a lender takes out to insure itself against the risk of not recovering the full loan balance if the loan account holder defaults. Loan Protection Insurance protects the borrower in the event of illness, an extended period of unemployment or death and cannot meet their repayment obligation.

  1. Loan Balance vs Loan Limit

Your loan balance is the current amount owed to the lender taking into account any redraw that may be held in the account. Your loan limit is the current limit of the loan net of the redraw in the account, that is, the total amount you are able to draw from the account. A lender will assess your capacity to borrow on your lending limits not loan balances. This is also applicable to other loan facilities as well as credit cards.

The world of home loans and mortgages has its own unique language and terminology with many applicants misunderstanding and being confused by common terms.  That’s where the team at Blackburne Mortgage Broking come in. We are here to explain everything in a plain English and make your home loan journey easy every step of the way. Just ask us.

 

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