6. Lenders Mortgage Insurance
Lenders Mortgage Insurance (LMI) is a one-off, non-refundable, non-transferrable premium that’s added to your home loan. It’s calculated based on the size of your deposit and how much you borrow. The more you contribute to the purchase price of your property, the lower the cost will be. LMI protects the bank against any loss they may incur if you are unable to repay your loan. You will need to pay LMI if you want to purchase a home without the 20 percent deposit required by most lenders.
What does Lenders Mortgage Insurance mean for me?
LMI is a fee that a home buyer with a deposit of less than 20 percent will need to factor in and it varies depending on the deposit and loan amount.
A useful resource for estimating LMI:
You can estimate your LMI costs using a Lenders Mortgage Insurance calculator.
Lenders Mortgage Insurance in a sentence:
‘I managed to scrape together a five percent deposit, but I didn’t want to wait to save the rest so, I paid for Lenders Mortgage Insurance instead.’
7. Principal and interest loan vs interest only loan
Your loan is made up of two parts: the principal and the interest. You’ll make regular repayments which include both interest and a portion of the principal to ensure that your loan is repaid within the agreed loan term. Your monthly repayments will be based on your agreed loan term, e.g. 30 years.  If you’re paying an interest only loan, your monthly repayments will be exactly that – interest only for an agreed time, generally around 5 years.
What is the difference between a principal and interest loan and an interest only loan?
The main difference is in your repayments – essentially, an interest-only repayment will mean your repayment is lower. However, you’ll probably pay more interest over the lifetime of the loan. This is because when you are paying principal and interest, your loan balance is reducing, and your percentage interest payment is recalculated each month.
When you pay an interest only loan, your interest repayments stay the same each month for the fixed rate period. If you’re building, you’ll likely be placed on an interest only loan throughout construction, and then move to principal and interest once you get the keys.
A useful resource for estimating repayments for a principal and interest loan & an interest only loan:
You can estimate your repayments and total interest for an interest only loan using the calculator on the moneysmart website. You can compare these costs and repayments to a principal and interest loan using the same calculator.
Principal and interest loan and interest only loan in a sentence:
‘I put the new investment property on an interest only loan for now but may swap it to principal and interest next year.’
8. Contract of sale
A contract of sale is one of the important documents you’ll sign when purchasing a block or home. Prepared by a solicitor or conveyancer, it contains important details, including the address of the property, the names of the seller and buyer, and how much you need to pay for the property.
What does the contract of sale mean for me?
It’s important you have a conveyancer or legal representative look over this document to ensure you are protected. Aspects such as your initial deposit, the total price of the property, the fixtures and fittings included in the sale, settlement date and the cooling off period can all be negotiated and locked into this contract. It also includes important details you’ll need later – especially if you are building – such as zoning and sewerage plans.
Contract of sale in a sentence:
‘My conveyancer gave me the all-clear and I just signed the contract of sale’
9. Stamp duty
Stamp duty (or land transfer duty) is a type of tax paid by a buyer when purchasing a residential property. The amount of stamp duty you’ll pay will vary depending on the value of the property, when it was purchased, and whether you’ll be living in it.
What does stamp duty mean for me?
Stamp duty is paid upfront, so it needs to be carefully considered when thinking about your budget and the type of property you are about to purchase. It’s also important to research and see if you’re eligible for any concessions, such as the current stamp duty concession for home buyers in Victoria.
A useful resource for calculating stamp duty:
You can use the stamp duty calculator on the State Revenue Office website to estimate how much stamp duty you’ll need to pay.
Stamp duty in a sentence:
‘As a first home buyer purchasing a property valued at less than $600,000, I was exempt from paying stamp duty.’
10. Equity
Equity is the difference between the market value of the home and how much you owe on it.
What does equity mean for me?
Your equity is essentially how much you own of your block or home. This is an important number if you’re going to sell, but also if you want to buy. Many lenders will let you use your equity – rather than a cash deposit – to buy another home or investment property. There are also opportunities to refinance your home loan to access equity to fund large purchases, such as a holiday or car.
Equity in a sentence:
‘I used my equity to purchase my investment property in Ballarat.’
