Skilled Migrant Professionals Spring 2016 | Page 36

Finance

Australian Mortgage Basics
What are the building
blocks of a mortgage?
WHEN IT COMES TO UNDERSTANDING how mortgages work in Australia and the different types available to
you, it’s good to first look at the basic building blocks
of an everyday mortgage. Every mortgage is typically
made up of the following elements:

Principal

By Pamela
Palmqvist,
Mortgage Broker
at Element
Finance

The principal is the amount of money you borrowed
from a leader (typically a bank) for a new mortgage.

Interest
Interest is what the lender (again, typically a bank) will charge you for
the privilege of borrowing the principal that you need to secure a mortgage and buy a home. Interest rates vary from lender to lender, which is
why it is a good idea to shop around to see which bank or creditor will
offer you the best rate. Interest rates fluctuate depending on the market, the time you choose to buy and the type of mortgage you choose.
The interest rate will determine how much you end up paying in total
on your mortgage.

Down payment
A down payment is the amount you pay for the home upfront.

Lender’s Mortgage Insurance (LMI)
When buyers have less than 20 per cent of the value of the home
for a down payment, they will be required to pay mortgage insurance,
which is usually added on top of the loan.

Deposit
This is the sum of money that you deposit in trust when you make
an offer to buy a home. This amount will be held by the vendor’s broker, agent, lawyer or notary until the entire transaction is finalised and
closed.

Closing costs
Closing costs are the expenses associated with buying real estate.
These costs can include legal and notary fees, disbursement, property
and land transfer taxes, and adjustments for prepaid property taxes.

Amortisation
This refers to the time you will have to pay off your mortgage, which
is typically 30 years in Australia.

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www.smpmagazine.com.au | Spring 2016

What type of mortgage do you want?
No two mortgages are exactly alike and depending on your financial circumstances, your preferences and risk threshold, there are several types of mortgages to choose from. Here are the main options in
Australia.
Fixed-rate home loan
Rates stay fixed for an agreed period of time. Rates or repayments do
not fluctuate. Once the fixed-rate term matures, the loan rolls over onto
a variable rate. At this point, it is wise to double check that the new rate
is not through the roof.
Variable-rate home loan
Rate and repayments can fluctuate as the lender increases or decreases
the rate.
Intro-rate or honeymoon home loan
A basic ‘no frills’ loan with minimum fees for an introductory period of
time – usually two to three years. When the loan matures, the rate usually spikes, so it is wise to refinance or renegotiate the rate.
Low-doc loan
Typically used by self-employed applicants who do not have all the documents to go with a ‘full-doc’ loan application. Low-doc loans require
more equity from the borrower, usually 20-30 per cent.
Non-conforming home loan
This is for borrowers with past or current defaults on their credit file and
would, therefore, score poorly with the major banks. Higher rates usually apply as the borrower is considered a higher risk.