A 2018 study shows that first home-buyers struggle to understand some of the most basic property purchasing terms. According to the study of 1,000 Australians looking to purchase their first property, when given a basic property literacy test, 61% of first home buyers failed.
Without knowing the basic terms, you could be caught out with unexpected costs and extra stress. Your first home may end up being the biggest investment of your life, so 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.
Lenders Mortgage Insurance (LMI)
Many people are confused about Lenders Mortgage insurance (often referred to simply as 'LMI'), with 88% of respondents to the ME Bank survey believing Lenders Mortgage Insurance covered the borrower, not the lender.
Lenders Mortgage Insurance is what you need to pay when you have a deposit of less than 20% of the cost of the property. It acts as a ‘security’ to the lender, because those with less than a 20% deposit are considered ‘high risk’ borrowers.
The Lenders Mortgage Insurance fee (a percentage of your mortgage usually added directly to the home loan, so you don’t pay it upfront) can be thousands of dollars, and varies widely depending on the value of the property, the amount of the loan, and the lender. Lenders Mortgage Insurance 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 Lenders Mortgage Insurance before you commit to one lender. It can vary by as much as $5,000 for the same mortgage!
Let’s clear this one up quickly: You need to pay a deposit on auction day (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. Also important - there's no cooling off period.
The method of payment will depend on the terms and conditions set by the selling agent.
TIP: Before the auction, check with the agent how they want to accept payment for the deposit.
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
An offset account linked to your home loan could also save you thousands of dollars in interest, yet 63% of respondents to the survey didn’t know what an offset account was. Put simply, it’s a bank account linked to your home loan that’s offset daily against your home loan balance. As a result, you’re only charged interest on the difference between the two, so the lender charges you less in interest because they aren’t charging you interest on the full, actual remaining balance of your loan.