No, not the burly kind. Banks need complete confidence that you’ll pay back their loan, and require something of equal value as ‘security’ that they can acquire in case you can’t. Most people offer the property they want to buy as this security, so if you’re unable to make repayments, the bank can reclaim the property to recoup their losses (the loan). Others have a home loan guarantor (often a close family member) who put their own home up as security.
2. Loan-to-Value ratio
This just means the percentage of the loan against the value of the property. So, for example, if you have a $100,000 deposit for a home worth $500,000, the loan-to-value ratio is 400,000/500,000 or 80%.
Pro tip: Value is calculated by valuation instead of what you paid for it — not always the same thing!
3. Lender’s Mortgage Insurance (LMI)
A one-off premium to protect the bank in case there is a loss after a sale, or the early sale of a property doesn’t cover the outstanding debt. Calculated as a percentage of your home loan (it differs from bank to bank), it’s mostly required when your deposit is less than 20%*.
Pro tip: If you’re a UBank customer, you won’t need to worry about LMI. We require a minimum 15-20% deposit depending on your loan type, but we don't require LMI to be added to any of our current home loans.
4. Stamp Duty
Stamp duty is a tax on transfers of some types of assets (think businesses, property and houses). It’s one of the largest expenses you’ll face when buying a new home (outside of the home itself) and it definitely needs to be factored into your overall budget.
Unfortunately, there’s not much you can do about Stamp Duty, but it does vary from state to state with concessions available for first time homeowners. Try out our calculator to find out what it might cost you.
Equity is the value of your property minus how much of your loan is left to pay off. Note the word value and not price, as equity is measured against the value of your home today, not when you purchased your property.
The use of equity in most cases can be leveraged to borrow more money for other projects e.g. a home loan for an investment property, a car loan or a personal loan for renovations (which could further improve the value of your property and resulting equity).
Pro tip: Banks will often lend you around 80% of your equity to protect against any shortfall in the housing market. And costs like stamp duty still apply.
6. Assets and Liabilities
Anyone subjected to a compulsory accounting subject at university or who has applied for a credit card or personal loan may feel uncomfortable reading this, but in the home loan world these terms are unavoidable. So, let's break it down:
Assets: Something of value that can be turned into money.
- Real estate properties
Liabilities: In a word: debt.
- Existing loans (car, home, personal)
- Student loans like HECS-HELP
- Credit cards (usually measured by your maximum limit and not the balance).
It’s perfectly normal for a bank to request a list of these to best understand how much money you can borrow without putting yourself at risk of default.
Serviceability is a measure of how likely the borrower will be able to afford to repay their debts, helping to determine how much they can borrow. Serviceability is typically calculated by collating all sources of income, then removing living expenses and loan repayments, for both existing debts and the new home loan that you are applying for . If the resulting number is positive, you could be good to go. If negative, some further discussions may need to be had.