Whether you are looking to purchase your first home, upgrade or invest, there are a number of factors to consider when entering the property market, yet alone coming to terms with property jargon. Below you'll find a glossary of key home loan terms to help you answer your property questions and put you on the front foot to purchase a new home.
Depending on the structure of your home loan, you will be required to make a set amount of mortgage repayments either weekly, fortnightly or monthly. Paying more than that required amount is known as making an additional payment. Additional payments help you pay off your home loan faster and reduce the amount you're paying in interest. Generally if you have a fixed loan, you can only pay up to a certain amount in additional payments during your fixed term.
A break fee is a charge borrowers face if they exit a fixed home loan early, and is usually a calculation based on the lender's wholesale funding rate at the time of the fix and now, and how many years are left on the fixed period. The larger the difference between the wholesale funding rates and years left, the larger the break fee is likely to be.
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.
All home loan lenders in Australia are required to display a comparison rate next to the headline interest rate. The comparison rate includes interest plus the usual fees and charges that apply for the life of the loan. It shows those costs as an annual percentage rate to make it easier to compare the cost of loans across different lenders.
Equity is the difference between the market value of your property and the outstanding balance on your home loan. For example, if your property is worth $750,000 and you owe $400,000 on your loan, you will have $350,000 in equity.
Fixed interest rate
A fixed interest home loan means 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.
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).
A guarantor is someone, typically a close friend or family member who has enough equity in their own property to provide security for your home loan. In simpler terms, a guarantor guarantees your loan repayments to the lender.
An interest-only (IO) home loan does not require repayments of the principal amount borrowed for a specific period of time. This is usually up to 3-5 years with many lenders - some even offer up to 10. This means the regular payments consist only of interest charges on the loan. Keep in mind that repayments will be much higher once you roll off the IO period, as the principal payments will be condensed into the remainder of your mortgage period.
Loan to Value Ratio (LVR)
The 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 $600,000 and can provide a $120,000 deposit, you'll need to borrow $480,000. That means your LVR will be 80%, so you'll be borrowing 80% of the value of the home, and have a 20% deposit. The higher your LVR, the greater risk you represent as a borrower, and your interest rate might be higher.
Lenders Mortgage Insurance (LMI)
Based on LVR outlined above, if this amount is greater than 80% your lender may require you to pay lenders mortgage insurance (LMI). This is a premium paid by borrowers to the lender on loans that are perceived to be of greater risk i.e. those that have less than a 20% deposit.
Low-doc home 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 home loan.
An alternative option to making additional repayments on your home loan is stashing any savings you have in an offset account. In essence, an offset account is similar to a transaction bank account in that you can have your salary deposited in the account and receive a debit card for everyday purchases. Money or savings that are stashed away in an offset account can help to reduce the interest charged on your home loan as you will only pay interest on the difference between these two account balances.
Before you can make an offer or bid 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. Pre-approval periods typically last 90 days - if you can't find and make an offer on a property in that time, you might have to re-apply.
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.
Refinancing your home loan refers to moving your mortgage from your current lender to a different organisation or account. Moving within the same organisation might also be called a 'reprice'. Refinancing is often completed when there are appealing benefits such as a lower interest rate, more flexible loan terms and features, smaller fees, special offers or debt consolidation requirements.
Redraw facilities can prove to be a handy feature to have on your home loan if you've made additional payments and then need to retrieve those funds down the track for an unexpected expense. Redraw facilities are commonly seen among variable rate home loans, while there tends to be much fewer fixed-rate loans with redraw facilities.
A reverse mortgage allows home owners - typically seniors or retirees - 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. Often this type of loan requires no regular repayments; instead, the principal and interest is recouped through the sale of the home when the time comes.
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 in the state in which you live or intend to live.
Variable interest rate
Repayments for variable interest rates tend to fluctuate with the official interest rate set by the Reserve Bank of Australia, depending on whether your financial provider passes on the change. If the official interest rate decreases, your repayment amount may go down and vice versa if the rate increases.
Looking for a competitive home loan rate? Check out our comparison of home loans from all the major Australian lenders, or try out our handy home loan comparison calculator to help you find the right home loan to achieve your new home goals.