Get your head around the confusing world of banking jargon.
So, you want to take out a home loan? Looking to buy a property can be an exciting time, but it can also be overwhelming. Especially when it comes to understanding all of the new legal and financial terms.
We’ve put together a list of words you’ll come across during your home buying journey so you can cut through the jargon and get a sense of what they really mean.
A bridging loan or bridging finance is a quick and easy way to finance your new home purchase while you’re still waiting to sell your current place.
Lenders sometimes offer rebates or cash back to tempt you to refinance with them. Cash back means you get money back after taking out the loan, while a rebate lowers your loan balance. But don’t forget to compare all the other charges and features when choosing a loan to make sure you’re getting a good deal.
Capital growth is the increase in the value of an asset, such as property, over time. It represents the difference between the original cost of the asset and its current market value.
A comparison rate is a helpful tool that shows you the real cost of a loan, beyond just the interest rate. It takes into account the interest rate, along with some of the fees and charges associated with the loan (though not all fees are included).
Conveyancing is the legal process of transferring ownership of a property from one person to another. It usually involves a legal professional called a conveyancer who acts on your behalf to review contracts, advise on any potential issues, coordinate with other parties, prepare all the necessary legal documents, and organise the payment of stamp duty and transfer fees.
Cooling off period
A cooling off period is a specified time frame – usually between 24 hours and 14 days – after you sign a contract during which you can change your mind and cancel the agreement without incurring any penalties or fees.
Deposit & genuine savings
Every home loan for first home buyers requires a deposit. But more than a lump sum of money, lenders want to see evidence of genuine savings – how the money has been built up in your account over a minimum of three months. This is to help show that you can afford your normal living expenses plus extra that you will now be able to direct toward your home loan payments.
Depreciation refers to the decrease in value of a property over time, usually due to wear and tear or obsolescence. This is different from capital loss, which occurs when the market value of the property decreases.
A discharge fee is charged by a lender to process the release of a mortgage on a property, when a borrower pays off their loan or refinances to a different lender. It covers the costs of processing the discharge of the mortgage, including closing out the loan and removing the lender’s security interest in the property.
Equity is the amount of money that would go back into your pocket after selling your home and repaying what’s left on your mortgage.
Fixed interest rate
A fixed interest rate is one that does not change, even if the market interest rates increase or decrease. This type of rate is typically offered for a set period of time, typically between one and five years, after which it reverts to a variable interest rate.
A guarantor is a person (usually an immediate family member) who can provide financial security for your home loan. The guarantor offers their property as security to reduce the loan-to-valuation ratio on your property, usually to avoid lenders mortgage insurance.
Home loan increase
A home loan increase refers to the process of borrowing more money from your mortgage lender, beyond the initial loan amount, using the equity built up in your home as collateral. This allows you to access additional funds for a specific purpose, such as home improvements or debt consolidation, while still making payments on your original mortgage.
An interest rate is the fee charged by a lender to a borrower for the use of money and is calculated as a percentage of the principal loan amount. The interest rate determines the amount of interest that will be added to the outstanding balance of the loan, and this in turn affects the monthly payment amount and the total cost of the loan over time.
Interest only repayments
Interest-only repayments are a type of mortgage repayment plan where you only pay the interest on the loan each month, rather than paying off both the interest and a portion of the principal balance. This results in lower monthly payments, but you will still need to pay back the full amount borrowed over time.
Lenders Mortgage Insurance (LMI)
If you take out a loan with a deposit of less than 20%, most lenders will require you to purchase LMI. LMI is an insurance policy that protects the lender if you default on your home loan. The cost of LMI varies depending on your deposit and loan amount and a one-off premium is added to your loan forming part of your regular repayments.
Loan-to-value ratio (LVR)
When assessing your ability to afford a loan, one of the main things your lender will look at is your LVR. This is the amount you wish to borrow as a percentage of the total valuation of the property.
Your loan term is how long your loan is expected to last, unless you pay it off sooner.
An offset facility is a type of bank account that you can link to your home loan. It allows you to use your savings balance to offset the outstanding mortgage balance, reducing the amount of interest they pay on the loan. In other words, the amount of money in your offset account is subtracted from your mortgage balance when the bank calculates the interest owed, effectively reducing the loan’s balance and interest payments.
Pre-approval is the process you go through to get conditionally approved for a home loan. It gives you an idea of how much you can borrow, and can give you the confidence to make an offer or bid at auction knowing your finances will be covered.
Principal and interest repayments
Principle and interest repayments are a type of mortgage repayment plan where a portion of your monthly payment is split between paying off the principal, or original loan amount, and paying the interest charged on the loan.
Refinancing refers to the process of obtaining a new loan to pay off an existing loan. This is often done to obtain a lower interest rate, longer repayment term, or to change the type of loan. Refinancing can also be used to access the equity in your home, allowing you to use the funds for other purposes.
A redraw facility is a home loan feature that allows you to access the additional repayments you’ve made on your loan if you need some extra cash down the road.
Rentvesting is when you rent a property to live in while buying an investment property that you then rent out. It can allow you to live in a desirable location that you might not be able to afford to buy in, while still getting into the property market.
Settlement is the process of transferring ownership of a property from the seller to the buyer. During the settlement process, the buyer pays the balance of the purchase price, and the title to the property is transferred to the new owner.
Serviceability refers to your ability to make repayments on a home loan, based on your income and expenses. Lenders will assess your serviceability to make sure that you will be able to manage repayments over the life of your loan.
A split loan is when you choose to divide your mortgage into multiple loans with different interest rates, such as a fixed rate and a variable rate. This can provide a balance of stability with the fixed rate portion and flexibility with the variable rate portion, allowing the borrower to take advantage of interest rate changes.
Stamp duty is a government tax on property purchases that pays for the transfer of property from one owner to another. How much you pay differs from state to state and, in some cases, depends on the type of property itself.
Variable interest rate
A fixed interest rate is one that changes over time as the market interest rates increase and decrease. As a result, the monthly payments on a variable interest rate loan may increase or decrease over time.
If you’re new to home loans, why not have a chat to one of our Home Loan Experts by booking an appointment. They can help you learn the lingo, figure out what you can afford to borrow, and answer your questions about the home loan process.