Home Loan Glossary - Essential Terms for Understanding Loans

Home Loan Glossary: Essential Terms You Need to Know

Struggling to understand home loan jargon? Our home loan glossary simplifies the essential terms for you. This glossary covers things you need to know to make informed decisions on your home-buying journey.

Adjustments

Adjustments are financial changes made at the time of property settlement. They ensure that the buyer and seller each pay their fair share of property-related costs. For example, if the seller has already paid council rates or water charges in advance, the buyer reimburses the seller for the portion that applies after settlement.

Amortisation period

This refers to the total length of time it will take to fully repay your home loan by making regular repayments. Most home loans in Australia, including those offered by credit unions, have amortisation periods of up to 20 or 30 years. A longer period usually means lower repayments but more interest paid over the life of the loan.

Appraised value

The appraised value is an estimate of a property’s worth, determined by a qualified property valuer. This value is mainly used by lenders to decide how much they’re willing to lend against the property. It may differ from the market value (what a buyer is willing to pay), especially in changing market conditions.

Assets

Assets are items of value that you own. These can include property, vehicles, savings, shares, superannuation, and other investments. When you apply for a loan, you’ll be asked to declare your assets, as they help demonstrate your financial position and ability to repay the loan.

Appreciation

Appreciation means an increase in the value of your property over time. This can happen due to factors such as improvements to the property, increased demand in the area, or general market growth. Property appreciation can be beneficial when refinancing or selling your home.

Applicant

The applicant is the individual (or individuals) applying for a credit product, such as a home loan.

Break Cost

Break costs are another important consideration, particularly for fixed-rate loans. These fees are charged if you pay off your loan early or switch to another loan product before the end of the fixed term. Awareness of these fees can prevent unexpected expenses and allow for better financial decision-making.

Bridging Loan

A bridging loan is a short-term facility of funds that covers the financial gap between the purchase of your new property and the sale of your existing property.

Capital Gain

Capital gain refers to profits gained from the sale of assets. Common assets you might have a capital gain on are shares and property.

Capital Gains Tax

Capital gains tax (CGT) is the tax you pay on profits from selling assets including investments, such as property, shares and crypto assets. Although it is referred to as 'capital gains tax', it's part of your income tax. It's not a separate tax.

Cash Back 

Cash back is a benefit that refunds a small percentage of a purchase some banks offer this as a promotion or an incentive to refinance.

Certificate of title

An official document that records and proves ownership of the property as an official record of ownership in Australia.

Comparison Rate

A comparison rate is designed to provide a more accurate picture of the loan’s true cost by including the interest rate and most fees and charges. For a comprehensive understanding of the comparison rate have a read of our article What is a Comparison Rate

Contract for the Sale and Purchase of Land

A legally binding agreement between a purchaser and a vendor that outlines the terms and conditions for the transfer of real property. It includes details such as the names of the parties involved, the address of the property, and the price. 

Conveyancing

A legal term that means the process of transferring a title of land to the new owner.

Construction Loan

A loan designed for construction or renovation projects. These loans depend on the progress of the work and are paid out in stages. Unlike a regular home loan that gives you all the money at once, construction loans provide funds as the project moves forward.

Cooling Off Period

A period of time after the exchange of signed contracts where the buyer of residential property can withdraw from the contract without legal or financial consequences, usually this can be a number of days such as 14 or 21 days. The rules for cooling off periods vary by state and territory. It does not apply to property bought at auction. Parties can agree to waive the cooling off period.

Conditional Approval

This letter shows how much you may be able to borrow after we check and assess the information you provided, along with a credit check. We will also mention what else we need from you, such as a Contract of Sale or valuation for your new property, before we can fully approve your loan.

Disbursement

Is payment of the approved loan funds from the Lender to the borrower. The loan funds can also be used to pay third parties at settlement.

Discharge Fee

A discharge fee is charged by a lender when a mortgage is repaid. The fee covers the administrative and legal costs incurred by the lender to close the loan and discharge the mortgage.

Draw down

This is where funds are released from a loan to a borrower under the loan agreement.

Equity

The difference between the market value of your property and the amount you still owe on your home loan.

Establishment fee

This is a once off fee at the start of the loan, sometimes known as an application fee, which covers the lender’s cost of setting up the loan.

Family Home Guarantee Scheme,

The Family Home Guarantee enables single parents to buy a home with only a 2% deposit, without lenders mortgage insurance.

Regional First Home Buyer Support Scheme

Offers a low deposit option for first home buyers in regional areas, backed by government support for up to 15% of the deposit. Learn more about the HGS scheme here Regional First Home Buyer Guarantee | Housing Australia

First Homeowner Grant (FHOG)

A grant established by the government to help the cost of buying your first home. You can read more about this www.firsthome.gov.au

Fixed interest rate loans

A fixed Interest rate is where the interest rate remains constant throughout the period the loan is fixed.  This means your monthly repayments will not change, during this period making it easier to budget and plan your finances. Borrowers often prefer fixed-rate loans when interest rates are low, allowing them to lock in favourable terms for an extended period. However, the downside is that you won’t benefit from any potential decreases in market interest rates.

Learn more about the difference of Fixed and Variable Home Loans

There are pros and cons to both fixed and variable interest home loans. Fixed offers more certainty whereas variable offers greater flexibility.

Learn More

Gifted Funds

Money which is given to you to help with buying a property.

Guarantor

A guarantor is someone who agrees to provide additional security to the borrower’s home loan and pay back the loan if the borrower is unable to do so. A borrower may be able to borrow up to 100% of a property’s value if they have a guarantor. Learn more about what is a guarantor loan.  

Investment Property Loans

Investment property loans are used to purchase a property that you do not intend to intend to live in. Some Banks will charge a higher interest rate for this loan type.

Investment property loans have unique considerations compared to standard home loans. One significant factor is capital gains tax, which is levied on the profits made from selling an investment property. This tax can impact the overall return on investment, making it crucial to keep detailed records of acquisition costs to lower the taxable gain on property sales. 

Loan to Value Ratio (LVR)

The Loan to Value Ratio, or LVR, is a critical metric in the mortgage world. To calculate it, divide the loan amount by the property’s value. Then, multiply the result by 100 to express it as a percentage. For instance, if you’re borrowing $400,000 to buy a property valued at $500,000, your LVR would be 80%. A higher LVR indicates a higher risk for the lender, as it suggests that you are borrowing a larger portion of the property’s value. Lenders often require borrowers with high LVRs to purchase lender’s mortgage insurance to mitigate this risk. Knowing your LVR aids in negotiating better loan terms and preparing for additional costs.

Learn More about LVR

 Loan Features and Options

Home loans often come with various features and options designed to provide flexibility and savings. These features can include offset accounts, redraw facilities, and the ability to make extra repayments.

Knowing these options helps in selecting a credit loan that best fits your financial situation and goals.

Mortgage

A mortgage is a loan used to purchase real property, with the property itself serving as collateral. This means that the funds borrowed are secured by the property, providing a form of insurance for the lender. If the borrower defaults on the loan, the lender has the right to take possession of the property to recover the outstanding loan balance.

Mortgage Protection Insurance

Mortgage protection insurance is another important consideration. This insurance covers your loan repayments if you are unable to work due to illness, injury, or redundancy.

Additionally, home insurance, which covers the property and permanent fixtures against events like fire and theft, is essential for safeguarding your investment. 

Property Appraisal 

A property appraisal is an estimate of your home’s market value, usually conducted by a real estate agent. This is done through a detailed inspection of your property. To determine the value, agents usually take into account the following factors: The property size, location, number of bedrooms, school zone boundaries, fixtures and fittings and property condition.

Pre-approval

Pre-approval, also known as conditional approval, is an indication from a lender that you’re eligible to apply for a home loan up to a certain limit This is based on information provided to the lender to assess the borrower’s financial suitability.

Redraw Facility

A redraw facility offers flexibility by allowing you to access extra repayments you’ve made on your loan. This can be particularly useful in emergencies or if you need loan funds for unexpected expenses.

However, while redraw facilities provide access to additional funds, they may come with fees for each redraw and limitations on the amount or frequency of redraws. It’s essential to understand these conditions to effectively manage your loan and avoid unnecessary costs.

Regional First Home Buyer Support Scheme

Offers a low deposit option for first home buyers in regional areas, backed by government support for up to 15% of the deposit. Learn more about the HGS scheme here Regional First Home Buyer Guarantee | Housing Australia

Settlement fee

A settlement fee can be charged when you first take out a home loan.

The settlement fee is what you pay to your settlement agent or conveyancing lawyer for their assistance. This fee includes their time and knowledge to prepare the required documents, perform searches and inquiries for you, and be present at the settlement. 

Strata Title

When you have a strata title property, you own your apartment or townhouse (known as a 'lot') individually, while also sharing ownership of the 'common property' like the driveway, entrance, and garden. A legal entity manages this common property.

Torrens Title

Is a land or registration and land transfer system, in which a state creates and maintains a register of land holdings, which serves as the conclusive evidence of title of the person recorded on the register.

Valuation fee

Your Home Loan Agreement may note a Valuation Fee. This fee covers the Lender’s cost to have a valuer assess the market value of your property.

Variable Home loan

A variable home loan is a loan with an interest rate that can fluctuate in line with the current market conditions and usually when the Reserve Bank of Australia makes a decision to increase the rate or decrease the rate, often banks are also able to fluctuate the rate based on their own margins.

Investment Property Loans

Investment property loans have unique considerations compared to standard home loans. One significant factor is capital gains tax, which is levied on the profits made from selling an investment property. This tax can impact the overall return on investment, making it crucial to keep detailed records of acquisition costs to lower the taxable gain on property sales.

Owner Occupied Property Loans

Owner occupied property loans are used to purchase a property that you intend to live in. Owner occupied home loans allow you to purchase a property that you can call your own.

This post is intended to provide general information of an education nature only. It does not have regard to the financial situation or needs or any reader and must

not be relied upon as financial product advice. As this information has bene prepared without considering your objectives, financial situation or need. You should, before acting on this, consider the appropriateness to your circumstances.