Home Loan Glossary: Learn the Lingo
Saving up for your dream home is one thing, but learning the lingo is another. This list of common terms will help you understand the process of buying and owning a home.
Loan that is paid out in stages to fund construction of a new property or renovation of an existing property.
Your profit after selling a property for more than the original purchase price. Tax may be charged on capital gains.
Rate expressed as a percentage that incorporates interest rate, fees, and charges associated with a loan. Comparison rates allow you to make a more accurate comparison between lenders.
Licensed professional who can prepare the legal documents related to the sale and purchase of property.
When you miss a mortgage repayment, you are in default. Your lender will first send you a letter regarding a missed repayment, followed by a default notice. If you do not take action by the time the default notice expires, your lender can take legal action and could repossess the property.
Your first payment towards purchasing your home, paid to the vendor when you sign your contract of sale. Lenders often require 20% of the purchase price as a deposit. If your deposit is not large enough, you may have to get a guarantor or pay Lenders Mortgage Insurance.
Home equity is the difference between the amount you owe on the property and its value at the time. Equity can fluctuate as you pay down your loan or as the property value changes.
First Home Owners Grant (FHOG)
Grant offered by individual states and territories to borrowers purchasing a property for the first time. Grant amounts vary by location, and can only be granted once. Eligibility rules apply, but properties generally have to be new or substantially renovated.
A fixed rate is an interest rate on your home loan that stays the same for an agreed period of time. Fixed rate periods generally last from one to five years, though they can go for longer. At the end of the fixed period the loan usually reverts to a variable interest rate.
A home that is in need of some repairs, which can be major or minor. These homes usually carry a lower purchase price that reflects the level of repair required, however, work may need to be done before it is liveable.
The act of borrowing money to invest in an asset. If you make a profit on your investment it is positively geared. If you lose money on the investment it is negatively geared.
A person or organisation who provides a security guarantee for the borrower’s loan. If the borrower defaults on the loan, the guarantor becomes liable. Guarantors typically provide a guarantee for a portion of the loan to help the borrower avoid LMI. The guarantor can be released from the contract once the borrower builds up enough equity.
Home Loan Top Ups
Use the equity in your property to draw out additional funds, increasing your home loan. This allows borrowers to access equity without taking out a new loan.
The amount a lender charges a borrower for borrowing funds. This is charged as a percentage of the principal.
Loan option where the borrower’s repayments only cover the interest charges. Interest-only periods are usually restricted from 5 to 10 years, after which the loan reverts to principal and interest. Borrowers who pay interest only will pay more interest over the life of the loan.
Loan for borrowers who do not live in the property but instead are renting it out. Investment loans tend to have higher interest rates and fees than owner-occupier loans.
Institution that lends money to borrowers. This may be a bank or non-bank lender.
Lenders Mortgage Insurance (LMI)
Type of insurance that protects the lender if a borrower cannot make their monthly mortgage repayments. Typically required when a borrower has a deposit of less than 20%.
Line of Credit
A revolving loan secured against your home equity, similar to a credit card with a very high limit. Borrowers can withdraw funds as required, only paying interest on the funds used, then pay them back. Funds can be redrawn as needed.
Loan to Valuation Ratio (LVR)
The amount you need to borrow in relation to the property’s value, usually expressed as a percentage. A high LVR presents a higher risk to lenders. To avoid paying Lenders Mortgage Insurance, borrowers generally need a maximum LVR of 80%.
Low Deposit Loan
Loans for borrowers with a low deposit, usually between 5% and 20%. Fees and interest rates may be higher, and borrowers may still have to pay Lenders Mortgage Insurance.
A contract where a lender agrees to loan money to a borrower for the purpose of purchasing property, and with the understanding that if the borrower defaults on repayments the property can be repossessed. The mortgage ends when the loan is repaid in full.
A financial professional who can offer home loans to customers and negotiate rates with the lender on their behalf.
A transaction account linked to your home loan that is used to offset the principle, thus reducing your interest charges. The lender calculates interest by subtracting the amount in the offset account from the amount remaining on the loan. Interest is then calculated on the remainder. Funds in an offset account do not earn interest.
Home loan for borrowers who also live in the property they are purchasing with the loan. Interest rates tend to be lower than with investment loans.
Conditional approval granted by the lender to establish how much you are eligible to borrow. This is based on an assessment of your current financial situation and is typically valid for 90 days to six months.
The total amount owing on your loan, not accounting for interest charges or fees.
Principal and Interest Loan
A loan repayment structure where the borrower’s repayments go towards both the interest charges and the principal.
Loan funds are released to the borrower in stages, as construction of a new home progresses. Funds are then used to pay the builder for work completed. This payment structure is used with construction loans and ensures that borrowers and lenders aren’t paying for work that has not been done.
A loan feature allowing borrowers to make additional repayments on top of their regular mortgage repayments. These extra repayments can later be redrawn and used as required. Making additional repayments can reduce the principal of the loan, thereby reducing interest charges. While variable loans often offer unlimited redraw, fixed rate loans may implement a cap on extra repayments.
Replacing your current home loan with a new home loan that offers better rates or terms. The new home loan will effectively pay off the old one. You can stay with the same lender or change lenders.
A loan used to fund home renovations, either by drawing on existing home equity or by taking out a new loan or credit card. Renovation loans include home loan top ups and line of credit loans.
A single loan split into two or more loans to allow the borrower to take advantage of different interest rate structures. Traditionally, split loans mean that one portion of the loan has a fixed interest rate and the other portion has a variable interest rate.
A tax imposed by state and territory governments on written documents and certain transactions, including transfer of property from one person to another. Also called transfer duty or duty. The tax is set by state and territory governments and is based on the property’s purchase price.
Strata title allows ownership of individual units within a multi-unit dwelling. It combines individual ownership with shared ownership. For example, an individual may own a single apartment in a block, but shares ownership of the building exterior and common space with other owners.
An interest rate that fluctuates in line with market interest rates, meaning it can change at any time.