Knowing the terms can set you on the right path

Anthony MatteoThe West Australian
Being aware of common terms can help you avoid confusion when buying your first home.
Camera IconBeing aware of common terms can help you avoid confusion when buying your first home. Credit: AntonioGuillem/Getty Images/iStockphoto.

Building a home can be a nerve-racking experience, especially for those new to the processes involved.

With much to consider, and wrap your head around, a good starting point is understanding the terminology you will come across during your homebuilding journey.

The Loan Company General Manager Simon Kahl outlines some of these terms for readers.


A term most of us have heard before, a guarantor, according to Mr Kahl, is someone that legally guarantees that the loan taken out by the borrower from a bank or loan provider will be paid back.

Often a family member, the guarantor assumes liability if the borrower fails to fulfil their repayments or defaults in their loan, so make sure to select someone you trust.

Mortgage Broker

Purchasing your first home is a confusing and overwhelming experience, however Mr Kahl recommends seeking a mortgage broker to join your corner.

“They can provide advice and guidance on all the financial aspects of the home loan process, and this begins with providing an estimate on how much a buyer can realistically borrow based on their earnings capacity,” he said.


A loan pre-approval confirms how much money you can borrow from the bank.

Mr Kahl said it was influenced by the property you wished to purchase being deemed an acceptable security in case you default.

Part of the pre-approval process includes the lender confirming your income and other information from your application. Essentially, this is the go-ahead to get the ball rolling.

Lenders Mortgage Insurance

Lenders mortgage insurance (LMI) refers to a form of insurance that the loan lenders take to protect themselves if you can’t repay the loan.

“The cost of LMI will vary depending on your deposit and loan amount, and can either be paid upfront or added to your loan amount,” Mr Kahl said.

“If you have a deposit of less than 20 per cent of the value of the house you wish to purchase, most lenders in Australia will charge you the cost of LMI.”

Loan-to-value ratio

A term often overlooked, the loan-to-value ratio refers to the percentage of the property value you actually need to borrow over the cost of the property

“As an example, if the property’s value is $400,000 and you have a deposit of $80,000, it means you have to borrow $340,000, or 80 per cent of the property’s value, giving you a loan-to-value ratio of 80 per cent,” Mr Kahl said.

Offset Accounts

“Mortgage offset accounts allow borrowers to use their savings and income to reduce the amount of interest they have to pay on their mortgage,” Mr Kahl said.

Offset accounts work by using the interest that would usually be paid by the bank on your savings to instead be deducted from the amount of interest you owe on your mortgage.

CONTACT The Loan Company, 6461 5444,

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