What should I ask a lender when I apply for a home loan?

According to a recent survey, eighty-four per cent of Aussies who are yet to buy a property say they need to know more about financial products such as home loans, rates and deposits. With this in mind, it’s important to ask the right questions before you start filling out application forms.

The bi-annual Know Your Numbers survey from UBank found that a significant percentage of surveyed Australians have little or no knowledge of some of the terms and jargon used in the mortgage and finance industry. If this includes yourself, here are some of the questions you may want to consider asking before you apply for a mortgage:

What is the loan to value ratio (LVR)?

Just over half for those surveyed admitted to having little to no knowledge about loan to value ratios (LVR). This industry term refers to the maximum size of the loan compared to the value of the property being purchased.

A home loan’s maximum LVR often relates back to the minimum deposit the lender will require. For example, a mortgage with an LVR of 80 per cent requires a deposit of at least 20 per cent. Similarly, a 90 or 95 per cent LVR home loan would need a deposit of 10 or 5 per cent respectively.

Knowing a lender’s required LVR can help give you a better idea of how much money you may need to save to qualify for one of their home loans. Of course, if your deposit is less than 20 per cent, you may still need to pay for LMI.

How much Lender’s Mortgage Insurance (LMI) will I need to pay?

UBank found that 41 per cent of those surveyed had little to no knowledge of LMI. Lender’s Mortgage Insurance is an insurance policy that covers the lender (not the borrower) against the risk of the borrower defaulting on their mortgage repayments. LMI is typically required whenever a borrower has a deposit of less than 20 per cent, and most lenders pass the cost of LMI on to the borrower – the lower your deposit, the more you may have to pay.

If you have a deposit of less than 20 per cent, you may need to account for extra upfront costs when budgeting for your home loan. You can use an LMI Calculator to estimate how much you may need to pay, and work out the most cost-effective way to manage your application.

Keep in mind that there are a few ways to minimise or eliminate your LMI charges. A few lenders offer to waive the LMI charge for borrowers with a deposit of at least 15 per cent. Grants such as the First Home Owner Grant (FHOG) can help boost the size of your deposit, and government programs like the First Home Loan Deposit Scheme (FHLDS) may allow you to get a home loan with a small deposit and pay no LMI. You could also look into a guarantor home loan, where your parents guarantee your mortgage with the value of their own home, so LMI won’t be required.  

Do you offer an offset account?

Around 38 per cent of those surveyed said they had little or no knowledge of offset accounts. These are savings or transaction bank accounts that are linked to your home loan. Specifically, the money you deposit in your offset account is taken into account when the bank calculates interest charges on your home loan, to help shrink your interest charges.

For example, if you had a $300,000 home loan, and $50,000 saved in your offset account, you’d be charged interest as if you only owed $250,000 on your mortgage.

Offset accounts are popular home loan features, as they allow you to effectively put more money towards your mortgage to save on interest, while still allowing easy access to these funds when you need them.

Just keep in mind that some lenders charge an extra fee for access to an offset account, and a home loan with an offset account may charge a higher interest rate and/or fees than a more basic “no-frills” home loan. Consider calculating the potential benefits of an offset account compared to the costs to estimate its overall value to you.

What’s up with your comparison rate?

The UBank survey found that only one in four (24%) participants said they know a lot about comparison rates, with just one in ten (10%) saying they have a perfect understanding. If you fall outside this number, the comparison rate is an indication of the overall cost of a home loan, including not just the interest charges, but the cost of everyday fees and charges too.

Mortgage lenders are required to display a comparison rate alongside their advertised interest rates, as sometimes a low-rate loan that charges high fees can ultimately cost you more than a mortgage with a higher interest rate. If two home loans have similar advertised rates, the option with the higher comparison rate is more likely to cost more in total.  

Keep in mind that not all fees and charges are included in the comparison rate, so it’s still important to look closely at the terms and conditions of each mortgage offer. Also, remember that the comparison rate is only a general indicator of a home loan’s cost – to maintain consistency, all comparison rates are calculated assuming a $150,000 loan on a 25 year term, which is unlikely to accurately reflect many typical mortgages today.

Will you be able to help me refinance in the future?

Only three in ten (31%) Aussies were found by UBank to know a lot about refinancing, with 12% saying they have a perfect understanding. For the unfamiliar, refinancing refers to switching one home loan for another, often from a different bank or lender.

Borrowers often refinance in order to get a lower interest rate, but also to get access to features and benefits that better suit their needs, or to switch to a lender whose customer service they prefer. Some borrowers also refinance with the goal of paying off their property faster, or to access equity from their property to help pay for other projects, or to consolidate other debts into their home loan.

It’s often worth keeping in mind that even if you aren’t eligible for your preferred mortgage when you first buy a property, you may be able to refinance your loan further down the track, once you’ve built up some equity in your property and improved your financial position.

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