Key home loan terms you should know
There’s a lot to consider when comparing home loans. Should you choose a fixed interest loan or opt for a variable rate? Do you qualify for the First Home Owner Grant? How much stamp duty will you have to pay?
Here’s a glossary of key home loan terms to help you answer those questions and more.
Conditional vs. unconditional approval
Pre-approval is typically given as ‘conditional’ or ‘unconditional’. Conditional means your final loan approval is subject to meeting certain terms and conditions. Unconditional means your loan has been fully approved.
First Home Owner Grant
If you’re looking for your first home, you may be entitled to a government grant. The eligibility criteria and amount will vary between states and territories, but most offer some sort of grant to first home buyers purchasing or building a new home valued up to $750,000. First home owner grants tend to range from $10,000 to $15,000 and come with strict eligibility criteria including the condition that you occupy the home within 12 months of purchase and live there for a continuous period of at least six months (or longer in some states). Contact your local state revenue office for more information.
Fixed interest rate
In a fixed interest home loan, the repayment amount stays the same for a set period and doesn’t fluctuate with shifting interest rates. That makes it easier to plan for payments in your budget, but you don’t get the savings benefit if the official interest rate drops during your fixed term and your lender passes on this drop to its variable home loan products.
Lenders Mortgage Insurance (LMI)
If your LVR is greater than 80 per cent, your lender may require that you pay Lenders Mortgage Insurance (LMI). This is a premium paid by borrowers on loans that are perceived to be riskier.
Loan to Value Ratio (LVR)
Your Loan to Value Ratio (LVR) is the proportion of the money you borrow compared to the value of the property. For example, if you want to purchase a property worth $500,000 and can provide a $100,000 deposit, you’ll need to borrow $400,000. That means your LVR will be 80 per cent, so you’ll be borrowing 80 per cent of the value of the home. The higher your LVR, the greater risk you represent as a borrower.
Low-doc loans are typically offered to self-employed people who may not have access to the proof-of-income documents that are required as part of the home loan application process. You may pay a slightly higher interest rate for a low-doc loan.
Before you can make an offer on a property, you need to have your finance ready to go. That means you’ll need pre-approval on a home loan, which is essentially confirmation that your loan provider will lend you the agreed amount provided you fulfil the requirements.
Principal and interest
Your home loan is split into two different repayment types: the principal is the amount of money owing, and interest is charged on top. Some home loans will allow you to make interest-only repayments for a set period, or you can make interest payments and pay off the principal to chip away at your mortgage faster.
A reverse mortgage allows home owners to borrow against the equity in their property. Equity is the difference between the value of the home and the amount of money you owe on it, and can be used to secure funds as a lump sum, income stream or line of credit.
Stamp duty is a tax charged when you purchase a property. Payable amounts vary from state to state and are usually linked to the value of the home – the higher the value of the property, the more stamp duty you’ll pay. A stamp duty calculator can help estimate how much you’ll need to pay on a given property.
Variable interest rate
Repayments for variable interest rates tend to fluctuate with the official interest rate, depending on whether your financial provider passes on the change. If the official interest rate decreases your repayment amount may go down, but if the official interest rate rises you might end up paying more. The Reserve Bank of Australia makes a decision on the official interest rate every month.