Home loan glossary
Navigating the world of home loans? This glossary explains some of the words and phrases that you’ll come across.
A
Amortisation
The process by which the value of something is reduced over time. Amortisation is often used to describe the outstanding balance of a loan that reduces over time according to scheduled repayments.
Arrears
A payment which is overdue, that is, it has not been made by the due date.
B
Body corporate
This is the corporation controlled by the owners of units within a multiple occupancy building, (like an apartment block). Together they manage and oversee the building and common areas.
Break costs
Costs incurred when a fixed rate loan is paid off before the end of the fixed rate period, or when additional payments are made in advance. These are also sometimes called early exit fees.
Bridging finance
Temporary finance to ‘bridge’ the gap between the time money needs to be paid out and money being received comes in. Typically used where a borrower wants to purchase a new property before selling their existing property.
C
Cash back
Lenders often use rebates or cash back as an incentive to refinance with them. Cash back gives you a refund once you’ve taken out your loan, while a rebate is a reduction in the balance of the loan.
Certificate of Title
This is a legal document that outlines the title or ownership details of a property, as well as key facts about the property, such as the land area, legal description and any restrictions.
Comparison rate
This is a rate that includes both the actual interest rate and the upfront and ongoing loan fees, expressed as a single percentage. For home loans, the comparison rate is currently based on a $150,000 loan over a 25-year term.
Contract of sale
This legal document is the written agreement outlining terms and conditions for the sale of a property between a buyer and the seller. Your solicitor/conveyancer should review this before purchasing.
Conveyancing
This is the legal process for the transfer of ownership of real estate.
Cooling off period
This clause enables you to discontinue a contract that you’ve signed, as long as you do so within the time stated. Depending on the type of contract, the cooling off period can vary between 24 hours and 14 days from the time the contract is signed.
D
Deposit
An initial cash contribution towards the purchase of the property, usually payable on signing/exchange of contracts.
Direct debit
This is an automatic funds transfer from one account to another. You can set up a direct debit to make your home loan repayments.
Disbursements
These are the incidental costs incurred by a solicitor when acting for a client, e.g. searches, certificates, past records, etc.
Discharge fee
When a loan is paid out in full, your lender may charge you a discharge fee. This is in addition to any break costs (if applicable). When you refinance, you are paying your lender out in full, so this fee type may apply.
Draw down
This refers to the transfer of money from a lending institution to the borrower before or after the loan has settled.
E
Extra repayments
If this feature is available on your home loan, you can make extra repayments that will reduce your interest.
Equity
Equity indicates your financial interest in a property or business enterprise, e.g. your equity in your house is the difference between its market value and the amount you owe on the house.
Establishment fee
This is a fee that is charged when applying for a new home loan, and is payable on drawdown of funds.
F
Fixed interest rate
With a fixed rate your home loan your home loan’s interest rate will not change for a set time. You can choose the period that you want to fix for. (Often this is between 1 to 5 years). This option may suit borrowers who want greater certainty with their regular repayments throughout the fixed term.
Fixtures
In real estate terms, fixtures are items that are permanently attached to a property such as lights, ceiling fans and landscaping. If removed they would cause damage to a property. If a seller wishes to remove fixtures, this must be stated in the contract of sale and damage made good, by the seller.
G
Guarantor
This is someone who agrees to be responsible for the payment of the loan if the borrower defaults or is unable to pay.
I
Interest only loan
An arrangement where the borrower pays the lender only the interest component of their loan obligation for a specified period.
Interest rate
Equity indicates your financial interest in a property or business enterprise, e.g. your equity in your house is the difference between its market value and the amount you owe on the house.
L
Line of credit
A flexible loan arrangement where the borrowers can draw down and repay the loan as they choose within a specified limit. Also referred to by some lenders as an equity loan or all-in-one loan.
Lenders Mortgage Insurance (LMI)
A form of insurance taken out by the lender to safeguard against a financial loss in the event of a security being sold due to the loan going into default. The borrower pays a once-only premium. The insurance covers the lender, not the borrower.
Loan term
The contractual period of a loan by when monies owed must be repaid.
Loan to value ratio (LVR)
The ratio of the home loan amount compared to the value of the security. Commonly called LVR. For example, for a loan of $270,000 on a home valued at $300,000, the LVR is $270,000 divided by $300,000 expressed as a percentage, i.e. 90%.
M
Mortgage
The legal agreement between a lender (mortgagee) and a borrower (mortgagor) that gives the lender the right to take the borrower’s property if they fail to repay the loan plus interest.
Mortgagee
The party granting the mortgage, usually in exchange for providing funds, i.e. the lender.
Mortgagor
A person who borrows money and grants a mortgage over their property as security for the loan, i.e. the borrower.
O
Offset account
A transactional account linked to the home loan. The balance held in this account offsets the balance in the home loan, helping to reduce the interest paid and the overall term of the loan.
P
Pre-approval
This is the home loan amount that a lender agrees in principle to offer you, subject to certain conditions. Pre-approval helps you learn what you can afford before you go house hunting.
Principal
The sum of money borrowed and therefore owed to a lender, excluding interest and other charges.
R
Redraw facility
A loan facility that allows a borrower to make additional repayments and then access those extra funds if necessary.
Refinancing
To replace or extend an existing loan with funds from the same lender or a different lender.
Repayments
This is the amount you regularly pay on your loan. The amounts are calculated based on what’s owing on your loan, your loan term and current interest rate.
Reverse mortgage
Also known as a ‘seniors loan’, this type of loan is aimed at retirees and allows them to take a loan as a lump sum and/or income stream, using the equity in their home. Although interest accrues on the loan, no ongoing repayments are required. The loan is repaid when the borrower’s home is sold, they pass away or move into aged care.
S
Security
The collateral offered as security for a loan is usually things like property, term deposits and shares, but other forms of security may be acceptable to some lenders.
Settlement
Finalisation of a financial transaction to start a loan. Documents and monies are exchanged to initiate the loan and formalise security.
Split loan
A loan that includes both fixed and variable components.
Stamp duty
A charge applied by state governments for various transactions including the acquisition of property. Most states offer some form of concession on stamp duty for first home buyers depending on the value of the property.
Strata title
A property title that grants ownership of a ‘unit’ in a larger building. This title is accompanied by body corporate membership involving management of the larger building.
T
Term
The length of a loan or a specific portion of time within the loan.
Title search
A request to the Land Titles Office to ascertain the ownership of a specified property and any encumbrances, covenants and easements that may be recorded on the title.
U
Unencumbered
A property free of encumbrances or restrictions, such as mortgages and other liabilities and charges.
V
Valuation
An assessment of the current and/or future value of a property. Usually, the assessment will be of the property’s market value. Lenders generally require a professional to undertake some form of valuation of the property that is securing the loan.
Variable interest rate
An interest rate that moves up or down during the term of the loan in line with market forces.