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2021-11-30 2:45 pm
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Home loan glossary

November 24, 2021
If trying get all your ducks lined up to make one biggest investments in your life isn’t hard enough, the terminology can be a confusing mess to navigate your through. To arm you against this confusion, here’s a breakdown of some of the most common terms you’ll come across on the home ownership journey.

Comparison rate. A comparison rate helps you know what the true cost of a loan is when comparing rates with other banks. It factors in the interest rate, fees and charges and displays a single percentage rate that can be used to compare various loans from different lenders.

Conveyancing: This is the word used for the legal processes that are needed to transfer ownership of real estate from one party to another. If you’re purchasing a home this will mainly include the preparation and lodgement of legal documents required to officially make the property yours.

Variable rate. A variable rate is one that changes, mostly in response to external factors, like when the Reserve Bank of Australia changes the official cash rate. It can go up or down depending on whether the bank lowers or raises interest rates. This gives you flexibility and it is often the lowest available rate, but it’s wise to factor in increases in payments.

First Home Loan Deposit Scheme (FHLDS): The FHLDS is an Australian Government scheme that helps first home owners purchase their first home sooner. The scheme guarantees your deposit up to 20% as long as you have a minimum of 5% deposit.

Fixed rate. A fixed interest rate does not fluctuate during the period of the loan that is fixed. Our fixed rate products are for one, two or three year periods. This means you can predict your payments for the duration of the fixed rate period but if the market changes and rates go down, your repayments will not.

Interest-only: If a home loan is described as ‘Interest only’ it means you will only pay the interest on the loan amount rather than ‘principal and interest’ which means you will start to pay back your mortgage as well as covering the interest.

Guarantor: A guarantor is a family member or friend who guarantees the payment of your loan if you are unable to pay it. For a home loan, a guarantor will also provide additional security to support the loan, generally an additional property such as their home or an investment property.

Lender's Mortgage Insurance (LMI): If you borrow more than 80 per cent of a property’s purchase price (above 80% LVR), you will need to pay insurance on the loan to protect the bank in case you default on the loan. How much LMI you pay depends on how much money you borrow and your location.

Loan to value ratio (LVR): Sometimes you hear lenders or brokers talking about LVR – this is the ratio between the amount you are wanting to borrow and the value of the property you’re purchasing. For example, if you have a 20% percent deposit, you’ll be looking at an LVR of 80%.  This figure is used to determine if you need to pay Lenders Mortgage Insurance.

Minimum repayments: The lowest amount that must be paid per month to meet the terms of your loan.

Mortgage Offset. The offset account complements your home loan. Any funds deposited in a 100% Mortgage Offset account are deducted from your home loan balance prior to calculating your interest expense each month.

Mortgage Offset: A mortgage offset can help you pay less interest on your home loan. Instead of charging interest based on the full loan amount, a mortgage offset takes into account money you have in other bank accounts linked to your home loan.

Principal: This is the amount you borrow and is used to describe home loans where you pay interest as well as making repayments on the loan amount (‘Principal and interest’).

Redraw: Our home loans allow you to redraw any additional funds that you’ve paid in advance. There’s generally a limit on the extra repayments that you can make on fixed home loans and in most cases redrawing does not apply to interest only and bridging loans. Depending on your loan, there may be fees or a minimum amount associated with your redraw – so check your contract. For convenience, you can organise redraws on your home loan through internet banking.

Refinance: This is the process of moving an existing home loan to another bank. People do this for different reasons; the ethics of the bank, to change the size or type of loan, or for a better rate.

Stamp duty: A tax that is applied by all states and territories and is based on a number of factors including the property purchase price, property type (owner-occupier vs investment) and location.

Variable rate: A variable interest rate is one that changes, mostly in response to external factors, like when the Reserve Bank of Australia changes the official cash rate. It is often the lowest available home loan rate and means your repayments go up or down depending on whether the bank lowers or raises interest rates.

There's some excellent information to assist with better understanding the language of lending. Check moneysmart.gov.au/glossary/a