Buying a house- jargon buster
Looking to buy a house? Understand the “language of property ” by jargon busting some of the real estate industry’s most frequently used – and often misunderstood – terms.
LVR stands for “loan-to-value ratio” and represents the proportion of your property purchase that will be funded by a mortgage (home loan). It’s usually calculated as a percentage.
For example, let’s say you’re buying a $500,000 property and have saved a $50,000 deposit. That deposit represents 10 per cent of the purchase price, so you would need a mortgage to cover the remaining 90 per cent. Therefore, your LVR would be 90 per cent.
The LVR is important for you to consider, as it affects how much you can borrow. Lenders have a cap on the LVR they’re willing to loan up to, and this generally falls between 80 and 95 per cent.
LMI stands for “lenders mortgage insurance”, which is a form of cover designed to protect lenders in the event that borrowers have difficulty making their repayments.
Most lenders will insist that you (the borrower) pay for LMI on any home loan with an LVR above 80 per cent. So while you may be able to borrow up to 95 per cent of the property’s value, you may have to pay a bit more in LMI to do so.
This one sounds fun, but is actually anything but. Gazumping occurs when you have a verbal agreement with an agent or vendor (the person selling the property) to buy a property at an agreed price, but the vendor then sells to someone else, usually for a higher amount.
Unfortunately, they’re quite entitled to do this. In fact, even if you’ve reached verbal agreement, the agent is legally obliged to pass on to the vendor any further offers received for the property up until the exchange of contracts.
What’s more, if you’re “gazumped”, neither the agent nor the vendor is obliged to compensate you for any money you may have spent on legal advice, inspection reports, finance application costs or inquiries. However, if you’ve made an “expression of interest” payment (see EOI below), it must be refunded.
A “friendly auction” is one designed to provide buyers with a greater amount of support and protection than is provided at traditional auctions.
For example, a clear and realistic price guide is often provided in advance, as is essential, current information about the property, such as a comprehensive building inspection report (reducing the buyer’s out-of-pocket expenses). More flexible terms and conditions are also provided for bidding.
No one could acuse the real estate industry of lacking acronyms! EOI stands for “Expression of Interest”, and is another means by which a property can be sold.
The property agent or seller invites the submission of written purchase offers – expressions of interest – from all interested parties by a specified time and date, generally 4-6 weeks from listing. Each potential purchaser will need to put forward their best and final offer, along with any conditions of sale, including settlement dates, finance conditions and sale inclusions and exclusions.
After EOI’s close, they will be discussed with the vendor only (they cannot be disclosed to other purchasers or any other party) and, if an acceptable offer is found, the sale will be made.
Subject to finance
When buying a house, the sale contract will have a “Subject to Finance” clause enabling you to terminate the contract in the event that your finance (home loan) isn’t secured by a certain time.
Take care when considering your finance clause that the time period provided is sufficient. Finalising finance can take quite a while, and if you breach your finance clause it may give rights to the seller to claim penalty costs, or terminate the contract.
Cooling off period
Unless you are buying at auction, your contract will always have a “cooling off period” – a few precious days during which you can consider your decision to purchase and change your mind if you wish.
Be aware, though, that in some states the seller is still entitled to keep a percentage of your deposit if you pull out of the sale during this period.