OFFSET accounts, redraw facilities, comparison rates and loan-to-value ratio are all common terms used in the mortgage industry.
But Australians are struggling to keep pace with financial language, and it could be hitting their hip pocket.
Signing up to a mortgage is often a person’s biggest lifetime expense and experts have urged borrowers to get a better understanding of the different terms that are used before signing on the dotted line.
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Independent research compiled for Gateway Bank quizzed 1000 mortgage holders and found the nation’s financial literacy has dropped.
Of those surveyed, the portion of mortgage holders who understood these terms was on the decline over the past year:
• For offset accounts, it was down 3 per cent to 53 per cent.
• Understanding of redraw facilities fell 4 per cent to 56 per cent.
• The difference between a comparison rate and interest rate was understood by just 31 per cent, down 5 per cent.
• Only 26 per cent knew what a loan-to-value ratio was.
Gateway Bank chief executive officer Paul Thomas said it was vital borrowers understood mortgage terms to ensure they had signed up to the best loan suited to their needs.
“People are sometimes afraid to ask basic questions for fear of looking silly,” he said.
“If you don’t understand a comparison rate or the benefits of an offset account you are probably going to overpay.”
He warned customers to make sure they understood these terms to ensure they were on the right deal “that keeps money in your pocket and not the credit provider’s”.
Mr Thomas said an average Gateway customer had $38,000 in their offset account and $11,881 in their redraw facility, which resulted in big savings.
Home Loan Experts managing director Otto Dargan said if borrowers failed to understand mortgage lingo it could result in them setting up their financial matters in an ineffective way.
“Some people have an offset account yet have their spare funds in a term deposit,” he said.
“So they’re earning 2.5 per cent and paying tax on it when they could be saving 4 per cent.”
Mr Dargan urged those who did not understand any mortgage terms to ask their bank or mortgage broker. “Realistically if finance isn’t your strength then you need to rely on an expert that you can trust,” he said.
Offset account: A transaction account linked to your home loan that offsets your interest costs. If you have a $300,000 mortgage and $10,000 in your offset account you’ll pay interest on $290,000.
Redraw facility: Extra repayments sit here and can be accessed or redrawn.
Comparison rate: It includes the interest rate and fees and charges associated with the loan.
Interest rate: The interest rate charged by the lender on the money owing.
Loan-to-value ratio: The ratio of the mortgage compared to the value of the property. If your home is valued at $500,000 and your loan is $400,000 your LVR is 80 per cent.