Has financial speak got you confused? Struggling to understand what all the terms mean? You’re not alone!
It can feel like you’re speaking another language sometimes when you’re considering a home loan, so here are our simple definitions on some terms you’ll hear often.
OCR—The Official Cash Rate (or OCR) is set by the Reserve Bank and is the rate banks pay to borrow money from the Reserve Bank.
The Reserve Bank Governor (the person in charge of the bank) reviews and sets the rate several times a year. They can raise or lower the rate, meaning major banks will often raise or lower their rates in response. The great news is in the latest OCR announcement they said they will keep rates low until 2020, meaning mortgage rates should remain relatively low and stable.
Inflation—this measures how much the cost of buying things (food, cars, clothes etc) is rising. The Reserve Bank works to keep inflation between 1–3 percent each year. Low inflation is good—it means the prices of goods aren’t rising too fast, and the economy is stable.
Loan To Value Ratio—you’ve probably heard this one a lot. LVR measures the size of your loan against the value of your home. Some loans are made at 90 percent of a home’s value, but banks are now looking for at least a 20 percent deposit. If the home you want to buy is valued at $500,000 this means you’ll need a deposit of at least $100,000 to meet their 80 percent rule. The rules get tougher if borrowing over 80%!
Equity—this measures ownership. So, if your house has a mortgage of $400,000, but is worth $600,000 you have equity of $200,000.
Gross Domestic Product—an important economic measure, in its simplest form, it measures our economy. It’s the total value of everything produced or made by a country.