Jumping into the world of home buying is like venturing into a foreign language, filled with peculiar terms like “LTV”, “APR”, “Fixed-rate”, and “Variable-rate”. But, there’s no need to panic, for Savage Finance, a trailblazer in the financial services industry, is here to be your guide. Our mission is to empower you, the aspiring first homeowner, with knowledge that will empower your journey to secure residential finance.

Term 1: Loan-to-Value (LTV)

The Loan-to-Value ratio, or LTV, is a pivotal term in your residential finance journey. It’s a ratio that compares the amount of your loan to the value of the property you wish to purchase. A lower LTV often signifies that you pose less risk to the lender and can result in more favourable loan terms and lower interest rates.

For example, if you’re planning to purchase a house worth $500,000 and you’ve got a $100,000 deposit, you’ll be borrowing $400,000. So, the LTV in this instance is 80% ($400,000 loan / $500,000 property value x 100). Generally, a lower LTV (below 80%) is preferred by lenders, as it reduces their risk.

Term 2: Fixed-Rate Mortgage

A fixed-rate mortgage is a type of loan where the interest rate remains constant throughout the life of the loan. This type of loan offers predictability, as your monthly repayments will remain unchanged, making budgeting easier.

If you’re looking for stability and fear rate increases, a fixed-rate mortgage might be a good fit. But remember, if market rates fall, you’ll be stuck with your higher rate until the end of your loan term, or unless you refinance.

Term 3: Variable-Rate Mortgage

On the other end of the spectrum, a variable-rate mortgage, as the name suggests, has an interest rate that can fluctuate over the loan term. With this type of loan, when interest rates fall, you’ll benefit from lower repayments. However, if rates rise, your repayments will increase.

If you’re comfortable with some uncertainty and can manage potential payment increases, a variable-rate mortgage could lead to significant savings if the interest rate decreases.

Term 4: Annual Percentage Rate (APR)

The Annual Percentage Rate, or APR, reflects the total cost of a loan per year, inclusive of the interest rate and any additional fees or charges. It provides a comprehensive view of the total loan cost, making it easier to compare different loan offers.

For instance, if you’re comparing two loan offers, one with a 4.5% interest rate and $500 in fees and another with a 4.3% rate and $1000 in fees, the APR could reveal the second loan might be more expensive over the long run, despite the lower interest rate.

Term 5: Pre-Approval and Pre-Qualification

Pre-approval and pre-qualification are preliminary steps that help determine your borrowing capacity. While pre-qualification provides a ballpark figure of how much you might be able to borrow, pre-approval is a more formal process where the lender evaluates your financial situation and gives a more definite figure. Being pre-approved can make you more attractive to sellers, showing you’re serious and financially ready to buy.

Term 6: Deposit

The deposit is the upfront amount you pay towards your home purchase. The more you contribute as a deposit, the less you’ll need to borrow, resulting in potentially better loan terms and a lower LTV ratio.

A common rule of thumb is to aim for a deposit of 20% of the home’s price to avoid paying Lender’s Mortgage Insurance (LMI). For instance, if the home price is $500,000, a 20% deposit would be $100,000.

Term 7: Credit Score

Your credit score is a numerical representation of your creditworthiness based on your history of managing debt. In Australia, credit scores range from 0 to 1200 or 0 to 1000, depending on the credit reporting bureau. A higher score typically indicates lower risk to the lender and can improve your chances of getting approved for a loan.

Maintaining good credit habits, like paying your bills on time, not applying for too many new lines of credit at once, and keeping your credit card balances low can contribute to a good credit score. Remember to regularly check your credit report for errors and rectify them as needed.

Conclusion: Navigating the Maze with Savage Finance

The world of residential finance can appear labyrinthine, but Savage Finance is here to be your guide, illuminating your path towards securing your dream home. Empowered with this knowledge, we believe you’ll be able to negotiate the mortgage landscape with greater confidence.