Home loan terms explained
Buying a property can be stressful enough with out the added frustration of having to decipher mortgage industry jargon. That’s why as part of our promise to take the confusion out of lending, we’ve come up with a glossary explaining some of the more commonly used home loan terms.
A home loan that has regular payments that do not cover the full loan by the end of the term, so a larger lump sum is due at maturity.
Someone who cannot pay their debts can apply for bankruptcy where a court will sell all their assets and release them from most of their debt. Bankruptcy is usually discharged after 3 years but it will still have a negative impact on a person’s credit rating. emoney is able to offer home loan solutions for customers who have experienced brankruptcy.
A unit of measure equal to 0.01% interest. For example, 25 basis points is an interest rate of 0.25%.
A penalty fee charged by the lender if a fixed-rate loan is paid in full before the fixed-rate period expires.
A limited term home loan used to help with the purchase of a second property prior to the sale of the existing one.
Federal tax payable on the profit made when selling an investment property.
A document lodged onto a property title as formal notification that a third party has an unregistered interest in the property.
A document detailing title and ownership information of a property and any mortgage or encumbrances on the title. Not all states and territories have certificates of title.
A rate that includes the interest rate and ongoing and upfront fees and charges to enable home loans to be compared on an equal basis.
The written agreement outlining the terms and conditions for the sale or purchase of a property.
Any alteration or change to the terms of a contract.
The legal process of transferring the ownership of a property.
The additional signature or signatures to verify the person signing a document.
An agreement whereby money is borrowed on the understanding it will be repaid to the lender.
Also, a sum of money paid into an account.
An evaluation of the credit-worthiness of an individual or corporation, based on their borrowing and repayment history.
A report from an authorised agency outlining an individual’s credit history, public records and any credit issues such as defaults or bankruptcy.
A person or organisation who loans money on the expectation it is to be repaid.
Interest calculated on a daily basis. Most variable rate loans calculate interest this way.
A bank access card with which you can make withdrawals from current funds in your bank account.
To combine one or more separate debts previously into one merged amount. A debt consolidation loan means you will have one loan repayment to manage but keeping in mind that the time to pay off this debt will increase to a full home loan term (e.g. 25 or 30 years).
Your lender will calculate your Debt Servicing Ratio to determine whether, as the borrower, you can afford the mortgage payments.
Failure to make a loan repayment by the agreed due date.
An agreement made by both parties to postpone repayment for a later date.
This is a substitute for a cash deposit to help with the purchase of a property. It is often used at auctions or when a buyer is waiting for their property sale to settle. The cash is still required at settlement.
The costs paid by a solicitor or conveyancer on your behalf for such things as search fees and stamp duty, which you usually have to reimburse.
Also known as a principal payment, this is the initial payment of the home loan, usually a small proportion of the total price.
The date the borrower first uses the loaned money. Unless you have a construction loan, this is typically at settlement.
The First Home Owner Grant (FHOG) is a federal government grant given to first home buyers to help them meet the costs of buying their first home.
A home loan where interest is fixed at a specific rate for a set term, usually 1-5 years
If a borrower fails to make their home loan repayments for more than 3 consecutive months, the lender may foreclose. They can force a sale, with the proceeds going towards recouping the mortgage debt.
This refers to interest payments that are charged at the beginning of a period, rather than at the end. This is generally only available with fixed interest loans.
The exact opposite of interest in advance. Here interest payments are due at the end of a period.
This is a type of home loan where no principal repayments are required during the interest-only period; the borrower simply pays the interest portion of the loan. Interest only loans are typically taken out by property investors who want to keep even cash flows.
An introductory rate is usually offered to entice borrowers with a low rate for the first 6 to 12 months of the loan. After the honeymoon period, the loan typically reverts to the Standard Variable Rate offered by the lender.
Home loan product for borrowers who do not intend to live in the property they are purchasing but to use it as an investment by renting it out. Investment loans tend to have a higher interest rate.
A person or organisation who provides money to another under the proviso that it will be repaid according to set guidelines and terms.
Lender’s Mortgage Insurance is a policy that protects the lender in the event you default on your mortgage repayments. It is a one-off payment that is typically required for home loans with a loan to value ratio (LVR) of over 80%.
LVR is used by lenders to evaluate your home loan application. It is calculated by dividing the amount you intend to borrow by the value of the property and expressed as a percentage. For example, if you intend to borrow $350,000 to buy a $500,000 property, your LVR is 70%. Home loans with an LVR of less than 80% are viewed as lower risk.
This is the regular minimum required repayment on your home loan.
The maximum loan to valuation ratio. This means the amount you can borrow expressed as a percentage of the valuation of the property you are buying. For example, 90% LVR means you can borrow up to 90% of the valuation of the property. The max LVR is set by the lender and varies depending on the product offered.
Another word for home loan. Where the property being purchased is used as security for the loan.
An offset account is an account linked to your mortgage and the balance in the account ‘offsets’ the principal of the loan. Overall interest is calculated on the principal less the offset account balance. For example, let’s say you have a $200,000 loan and $15,000 in your offset account. Because of your offset account, you will only be charged interest against $185,000.
An independent and impartial party/entity established within a particular industry, offering a free service to investigate complaints and resolve disputes.
An arrangement with your bank or lender to extend credit up to a maximum amount (overdraft limit) on your account. Interest is charged on the fluctuating daily balance.
Borrowers who intend to live in the property they are purchasing.
Home loans that include other accounts with the same financial institution, such as credit cards and transaction accounts.
Changing the security on your home loan. This typically occurs when you sell your current home to buy a new one and keep the same home loan.
The initial approval process that provides an estimate of how much you can borrow before you have found a property, based on information provided to your lender.
The total amount you want to borrow.
The money that goes towards repaying the original loan amount, rather than interest on the loan.
This is the overnight money market rate set by the Reserve Bank of Australia. The cash rate serves as a benchmark rate in the country and is one of the key deciding factors when lenders determine what interest rate to charge borrowers.
A feature of certain home loans that allows the borrower to withdraw money from loan repayments they have already made, This is not available on all home loans.
Switching from one home loan product to another. Your new loan is used to pay out your existing one, transferring the debt to your new home loan.
A temporary period of time where you make no repayments on your loan. You will need to arrange this with your lender who may allow you to make reduced repayments or suspend your repayments for an agreed period of time, typically less than 12 months.
If you fail to make repayments on your home loan within the agreed terms, the lender may reclaim possession of the security (usually your home).
A line of credit is a predetermined amount of credit that is secured against the equity of your home. Like a credit card, you can use this credit whenever you need it, e.g. such as the purchase of a second property or other investments. These types of loans generally incur a higher interest rate than a standard variable rate loan.
An asset, usually the property, that guarantees the lender their loan until the loan is repaid in full.
The date that ownership of the property is transferred from the seller to the buyer. This takes place when the purchase process has been finalised, money exchanged and documentation completed. The buyer typically gets possession of the property on the settlement date.
Home loans for borrowers who do not meet the standard criteria for traditional home loans, such as self-employed, those with poor credit, or who have recently migrated to Australia. These loans typically have higher interest rates
A type of home loan where a portion is locked into a fixed rate product and another portion comes with a variable interest rate.
In property terms, stamp duty (sometimes called transfer duty) is a tax which is payable to the state government when property ownership is transferred. A number of factors determine stamp duty including location and cost of the property. Use the stamp duty calculator to work out how much stamp duty you may have to pay on your property purchase.
A valuation is an estimate of a property’s value undertaken by an independent, accredited valuer. It is this determination of value your lender will use to assess your loan.
A variable interest rate is the fluctuating rate of interest on your home loan. It is based on a number of factors including the RBA cash rate and prevailing lender sentiment. The obvious advantage of a variable interest rate is that it can reduce if the RBA cash rate drops.
The process of varying your home loan. For example, switching from a fixed rate to a variable rate, with the same lender. There is usually a fee associated with applying for a loan variation.
The seller of a property.