In the simplest terms, the LVR is the percentage of the property’s value, as assessed by the lender, that your loan equates to. So, if the property you want to purchase is valued at $500,000, and you need to borrow $400,000 to pay for it, the loan is 80% of the property value, making your LVR 80%.

LVR is important because different lenders and loan types have different maximum LVRs, and some lenders will only lend up to a certain LVR for properties in certain areas.

Most lenders will finance up to 80% LVR although some will finance a greater percentage (which will usually incur lender’s mortgage insurance).

LMI is insurance that covers the lender’s risk within a residential mortgage transaction should the loan go into arrears and the borrower is unable to resolve the situation satisfactorily. 

LMI is a fairly common practice within the industry, particularly for new home buyers who may struggle to save a deposit. It is an additional fee to be paid by the borrower and usually applies when the loan is more than 80 percent of the purchase property’s price.

Even though the actual house acts as security, the nature of the property market, like any investment class, means there is a chance that its value could decline, resulting in a financial loss for the lender.

The cost of LMI is dependent on several factors, such as the loan size and property value, and most insurers are flexible when it comes to the method of payment. It can either be a one-off upfront premium payment or that premium could be included in the overall cost of the loan and included in monthly repayments. It is not transferable, which means a new loan may require a new fee depending on how much equity the borrower has.

While it may appear that it is exclusively favourable to the lender, there is value to borrowers in paying the premium. Opting for LMI means it allows a borrower to independently purchase a property sooner than they otherwise might. LMI is the alternative to using a guarantor or having to save for a bigger deposit, both of which are not feasible options for many first home buyers.

Borrowers can generally decide between these two loan types fixed rate or variable rate. Put simply, fixed rate loans maintain the same interest rate over a specific period whilst variable rate loans change interest rate according to market fluctuations. However, there are a few other differences which need to be considered when determining the right loan for you.

Fixed rate loans usually come with restrictions to maximum payments which can be made during the fixed term, meaning additional loan repayments (above required minimums) may not be able to be made. Further, borrowers can face hefty break fees for paying off the loan early or switching loan types during the fixed period. 

However, locking in an interest rate can offer borrowers stability, providing certainty of repayment amounts and allowing more accurate budgeting.

Most lenders offer a ‘rate lock’ option when making application for a fixed rate loan, meaning you can lock in the fixed rate for a period of between 60 to 90 days from the application date, providing time to settle the loan at the rate at which it was locked. This protects the borrower against potential fixed rate increases during the time between application and settlement.

Alternatively, variable rate loans commonly offer the ability to make additional repayments over and above your minimum, thus providing the opportunity to save on interest by paying your loan down quicker.

In addition, borrowers should consider the possibility of arranging a ‘split’ loan. This option allows you to split your loan between fixed and variable rates – either 50/50 or at some other ratio. This can allow you to ‘lock in’ a fixed interest rate on a portion of your loan, while the remainder is on a variable rate which may give you more flexibility when interest rates change and potentially minimise the risks associated with interest rate movements. 

Be aware that at the end of the fixed-rate term, your loan agreement will include information about how the loan will then be managed by the lender, usually to a ‘revert’ variable rate – which may not be the lowest the lender offers. It is recommended to contact your broker at the end of any fixed rate period to conduct a loan review.

Offset accounts and redraw facilities work in similar ways; they both allow you to reduce the balance of your home loan, and therefore the interest charged, by applying extra money to your debt. 

Redraw facilities allow you to deposit spare income into your home loan account, allowing you to redraw a sum equal to the extra repayment amounts in future. In the meantime, the extra money paid will lower the amount of interest charged while still giving you access to your money. However, there may be restrictions on how much money can be withdrawn and when. 

Offset accounts are like savings accounts that function alongside your home loan. You earn interest on the money in the offset account and you often have a debit card attached for simple withdrawals. 

With 100 per cent offset accounts, you earn interest equal to the interest you are paying on your loan. 

For example: Let’s say you have $10,000 in your 100 per cent offset account. Instead of paying interest on your $100,000 loan, you are only paying interest on $90,000. 

The interest rates that banks charge on their home loans are influenced by the Reserve Bank of Australia’s (RBA) cash rate. 

The cash rate is reviewed by the RBA on a monthly basis in order to safeguard Australia’s economic stability. The cash rate is the rate charged on loans made between the RBA and your lender. This, in turn, has a very strong impact on the interest rates your lender charges you.

“The RBA supports the banks with liquidity facility,” explains the finance broker. “The RBA is a bank to the banks. The cash rate is effectively the rate at which the RBA will lend to the banks, and what the banks effectively use as a reference rate for other things.”

When the cash rate is changed by the RBA, lenders decide whether or not to mirror the new rate in the interest they charge their mortgagees. 

This is entirely up to the lender in question and depends on the market and how the lender is performing at the time of the cash rate change.