Home loans decoded: your essential guide from A to Z
Buying a home can be exciting, but also complicated. Here is your essential guide to the experience, with tricky terms decoded, from A to Z.
From buying a new home to interest rates, first home buyer grants to downsizing and investment properties to capital gains tax, there’s so much to know about home loans and the terminology that goes along with them.
Let this essential guide to the A-Z of home loans help you decode the jargon…
Auction: The (often nail-biting) process of publicly placing competitive bids to buy a property. If the hammer falls, and you’re the highest bidder, you’re required to sign a contract on the spot and pay the deposit.
Borrowing power: The loan amount you might be able to borrow, depending on your financial and personal circumstances.
Borrowing calculator: A handy tool to help quickly estimate how much you may be able to borrow, based on your income and expenses.
Break costs: The fee a lender charges a borrower if the borrower decides to ‘break’ the fixed term of their loan prior to its agreed expiry date (usually with a ‘fixed’ interest rate), or if they make extra repayments above their maximum allowed amount.
Bridging finance: A short-term loan that allows you to purchase a new property while you’re still in the process of selling your existing property.
Capital gain: The profit you make when you sell certain property or assets for more than you paid for them. Capital gains tax is the tax you pay on profits from selling these assets.
Comparison rate: A rate that combines most fees and charges associated with the loan as well as the interest rate. It’s usually quoted alongside the nominal interest rate and can give a more complete picture of the overall costs of the loan. This helps the borrower to compare different loan offers.
Consolidating debt: When you take your existing debts (credit card, personal loan, car loan, or all of the above) and consolidate them into a single loan, preferably with a lower interest rate.
Conditional approval: Sometimes known as home-loan pre-approval, this is when a lender gives you an estimate of how much you might be able to borrow. You can then go hunting for properties in a certain price-range with more confidence that you’ll meet the lender’s criteria.
Construction loan: A type of home-loan for those who are building or renovating property, giving you access to money progressively to complete different stages of work.
Cooling-off period: The time after you purchase property, when you can pull out of the contract without legal repercussions. Check the contract before you sign to find out if there is a cooling-off period and how long it lasts. When you buy at an auction, the cooling-off period is usually waived.
Debt recycling: This is a way to help you pay off your home loan (non-deductible debt) faster by replacing debt on your home with a tax-deductible loan for purchase of investments.
Default: When a borrower cannot repay the loan to the lender.
Deposit: Your initial contribution to the purchase price of a property. Many lenders require 20% of the purchase price; some will accept lower if you pay Lenders’ Mortgage Insurance (LMI). Work out how long you need to save to reach your deposit goal.
Disbursements: The asking price is not the only figure involved when buying or selling a house. Incidental costs might include a solicitor as well as searches, certificates, stamp duty, inspections and more.
Drawdown: This is when your lender releases funds to the vendor on settlement day. It could also include progress payments on a construction loan or drawings on a line-of-credit.
Establishment fee: The costs (varying between lenders) you may need to pay to produce and file documents to set up your home loan. This could include the loan application fee, valuation and property title search fees, mortgage
stamp duty and registration fees.
Equity: Your ‘stake’ in your home. The current market value of your home, less the amount still owing on your home loan.
Extra repayments: Paying off more than is required by your loan agreement. Making extra repayments will decrease your overall interest cost and shorten the term of your loan. If you have a variable loan, this is usually no issue. But if you have a fixed-interest loan, there are often caps and penalties on extra repayments.
Finding the right home for you: What to look out for when searching for, and inspecting, a property, whether you’re an owner-occupier or an investor.
First Home Super Saver Scheme: A Federal Government scheme that allows eligible first-home buyers to withdraw voluntary superannuation contributions (plus earnings) to put toward a home deposit.
First-Home Owner Grant: The goal of this scheme is to help first-home buyers enter the residential property market. If you meet certain criteria, you may be eligible for a one-off payment to assist with the purchase cost. Note: the scheme varies between states and territories.
Fixed interest rate: A defined, unchanging interest rate for a specified fixed term. At the end of the term, you can choose to fix your rate for another period, switch to variable, or split your loan between fixed and variable interest rates.
Guarantor: Another person, often a family member, (the guarantor) promises a lender (the bank) that you (the borrower) will meet your loan repayments as agreed. If you don’t, the guarantor can become responsible for paying back the entire loan.
Home loan types: There are different types of home loans available including variable and fixed rates (or a combo of both), as well as principal and interest and interest only repayments. Get to know the different interest rates, fees and charges you might encounter along the way.
Hidden costs: There’s more to buying a property than the purchase price. On top of this, you’ll need to budget for legal fees, rates, stamp duty, application fees, insurance and more…
Interest rate: The rate you’re charged by your lender for borrowing money, expressed as a percentage of the total loan amount. There are different types of interest rates (including fixed and variable) as well as repayment options.
Interest only: Where your mortgage repayments only cover the interest charged on the amount borrowed, which means the principal debt itself isn’t reduced. Most lenders cap the interest-only period – after that, it reverts to principal and interest repayments.
Investment property: Unlike buying a home to live in, an investment property is usually bought with the goal of making money via rent and capital gain. It can be a passive income stream, but there are things to consider before you dive in – like the fact your loan interest rate may be higher than an owner-occupier loan – and tips to follow when you take the plunge for the first time.
Joint tenants: If you’re buying a property with someone else, becoming joint tenants means each buyer owns an equal share. If one person dies, their ownership share passes to the survivors automatically. Your share cannot be left to someone else in your will. Your share in a joint tenancy also cannot be individually ‘sold’, unlike when property is owned as ‘tenants-in-common’.
Lenders mortgage insurance (LMI): A fee some lenders charge if you’re looking to purchase property, but don’t have a deposit of at least 20%. This is insurance to protect the lender against loss if a loan defaults, when there’s a higher risk involved.
Line of credit: This is a type of flexible loan that lets you borrow money when you need it. While traditional loans have a fixed-term, a line of credit lets you access funds whenever you want, up to your credit limit, and you can repay lump sums and/or make regular payments over time.
Loan-to-value Ratio(LVR): When you compare home loans based on factors like interest rates, repayment type and repayment period and fees.
Loan comparison A ratio expressing the loan amount against the property value as a percentage. For example, a loan of $300,000 against a property worth $600,000 has an LVR of 50%.
Master limit: This allows you to get an approved line of credit with a maximum limit, giving you a choice to add or close multiple accounts within that specified limit for a specified period. This is useful where some of the borrowings are tax deductible, but some are not.
Minimum repayment: The minimum amount you pay to your lender to service your loan. This amount will be higher if your loan is principal and interest, and lower if you opt for interest-only repayments.
Mortgagee: The lender.
Mortgagor: The borrower.
Mortgage check-up: Many of us take out a home loan and forget about it. A few regular checks will help you decide whether your home loan is still right for you, or if you could get a better deal.
Negative gearing: This is when you make an income loss on your investment property, as your interest payments and property-related costs are higher than the rental income you receive. There are pros and cons to this.
Offset account: An account which operates like a transaction or savings account but is linked to your home loan. The funds in the account offset the balance of your home loan, so you’re only charged interest on the difference ie the ‘reduced’ home loan amount.
Owner-occupied: When you (the borrower) live in the property you purchase.
Positive gearing: An investment strategy where you take out a loan to purchase an investment property, and your rental income is greater than the interest, property holding and ongoing maintenance costs. That is, the property makes an income profit.
Principal: The initial size of your loan, or the amount still owed on your loan.
Principal and interest: A type of loan repayment that requires you to pay off part of the loan amount you borrow from the bank (the principal) as well as the interest accrued on the principal amount usually on a monthly basis, although you may be able to choose to make repayments more often.
Private sale: Unlike auctions, private sales have no official end date to the sales campaign. Buyers make an offer based on the asking price advertised, and if the offer is accepted, contracts are exchanged and a deposit is required.
Progress payment: If you’ve taken out a construction loan, progress payments are payments your lender makes to the builder as they progressively complete the building and fit-out.
Redraw facility: A facility of a home loan that allows you to access extra money you might have already paid off your loan, ie in addition to your minimum monthly repayments.
Refinancing: A process where you replace your existing home loan with a new one that’s ideally more cost-effective and flexible. There are pros and cons to this process. Use a home-loan refinance-calculator to help understand whether it might be worth your while. Don’t forget you can also talk to your current lender to see if they will offer you a better deal.
Serviceability: When a lender assesses your income and other commitments to calculate your ability as a borrower to make loan repayments.
Settlement: The legal process where ownership of the property passes from the seller (vendor) to the buyer. This is the final part of the sale/purchase process when the balance of the sale price is paid to the vendor.
Split home loan: Can’t decide between a fixed or variable interest rate? A split home loan combines elements of both, with a fixed rate applying to part of your home loan and a variable rate applying to the rest.
Stamp duty: A mandatory government tax you pay on any property purchase or on your mortgage. There’s no fixed amount – how much you’re liable for depends on factors including the state you live or bought in, how much you paid for your property and what type of buyer you are (eg concessions may apply to first home buyers).
Tenants-in-common: Under this structure, you can own unequal shares of a property you buy together. Each owner can sell their share to someone else, and if one owner dies, their share is managed according to their will. It is possible, although not always practical, to sell your share in this ownership structure to another party, even to someone who is not related to the other owners.
Term: The term of your loan is the agreed period of time over which the loan must be repaid or will remain available to you. A home loan commonly has a nominal term of 25 or 30 years. A line of credit, on the other hand, may have no fixed term.
Terms and conditions: The terms and conditions of your loan are the legal agreement or contract between you and the lender. They include the term (or duration) of the loan, intertest rate, repayments and other requirements such as insurance and upkeep of the property and other rights and obligations of the borrowers and lender, including what happens if the loan defaults.
Top-up: A way to increase the amount of your home loan, provided you have equity in your property and can make extra repayments. You may use the top-up funds for renovations or other purposes.
Unconditional approval: Your lender has gone through your application, financial circumstances, and property valuation and decided to offer you a loan based on the property you want to buy.
Valuations: Bank valuations may differ from the price you pay for your property. They consider factors like the condition of the property you wish to purchase and comparable prices in the suburb. The valuation is used by the lender as part of their assessment of the risks involved in lending you money.
Variable interest rate: The interest rate you pay over the life of your loan will change – it could go up or down depending on factors like the RBA cash rate and other market conditions.
Vendor: The person selling their property to you.
This document contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. The examples used are illustrative only and are not an estimate of the investment returns you will receive or fees and costs you will incur.