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Deciphering the language of home loans

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. 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.

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 change during the period of the loan that is fixed. 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.

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.

Interest-onlyIf 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.

Lender's Mortgage Insurance (LMI): If you borrow more than 80 per cent of a property’s purchase price (above 80 per cent 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 can depend on how much money you borrow and your location.

Loan to value ratio (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: 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: Many loans, like Bank Australia’s, allow you to redraw (take out) any additional funds that you’ve paid on your home loan, in advance. This can be particularly helpful for renovations or other major expenses that life throws at you. Depending on your loan, there may be fees or a minimum amount associated with your redraw – so check your contract.

Refinance: This isthe 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.