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Home Loan Glossary

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“Redraw”. “Offset”. “LMI”. Have you been reading up on home loans and getting stumped by terms like these?

Our Home Loan Glossary will explain it all to you!

Annual Percentage Rate (APR):

The cost of borrowing the money – what you pay for the loan.

Basis Point:

A unit of measure used in finance to describe the percentage change in the value of interest rates. One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form. For example if interest rates fall from say 5.50% to 5.0% it means that the rates have dropped 50 basis points.

Caveat Emptor:

“Let the buyer beware” in Latin. Lawyers love Latin.

Comparison Rate:

The Comparison Rate is an indicative interest rate. For home loans, it is calculated on $150,000 over a 25 year term and includes all the credit fees and charges ascertainable at the time. It is designed to help home buyers identify the 'true cost' of a loan.

This is an important rate, required to be displayed next to the interest rate in any advertising, and is there so you can easily compare the real costs of various loans. It's important to consider all the features and benefits of the loan - rather than only focusing on the Comparison Rate. Benefits such as redraw, 100% offset and ability to make additional repayments / flexible repayment periods can make a difference to the attractiveness of a loan.

Conveyancer:

Someone who performs the service of conveyancing. A conveyancer may be a lawyer who does conveyancing as part of their regular practice, or a dedicated conveyancer who does nothing but conveyancing.

Conveyancing:

The process of transferring the ownership of a property from a seller to a buyer. A person who performs this service is called a conveyancer.

Default:

When a loan customer doesn’t meet their obligations under the loan contract.

Deposit:

The amount of money you put towards the purchase of a property. Normally a deposit of 20% is required if you want to avoid paying for LMI (see Lenders Mortgage Insurance)

Drawdown Date:

the date the when the borrowed money is used – usually the day when you pay the seller of the house, or your builder.

Equity:

The difference between the value of your house and what you owe on your loan. For example, if you owe $100,000 against a property valued at $300,000, you have $200,000 equity in the property.

Extra (or “Additional”) Repayments:

Payment you make towards the loan in addition to your normal repayments. This allows you to pay back the loan sooner, which means less time to build up interest, saving you money in the long run. Not all loans offer this. As a bonus, if your loan has a Redraw Facility, then you might be able to withdraw some of these extra repayments to use in an emergency.

First Home Owner’s Grant (FHOG):

A grant from the government payable to encourage new home buyers. The nature and terms of these grants may vary from state to state, so be sure to check with what this grant means for you.

Fixed Interest Rate:

This means your interest rate, and therefore the amount you repay, won’t change for the fixed rate period of the loan. This means your repayments won’t go down…but they won’t go up, either. A fixed rate can be handy for planning your budget. You might also see this called “Fixed Interest”, a “Fixed Rate”, or simply described as “Fixed”. See also Interest Rate and Variable Rate Interest.

Guarantor:

A person or entity that agrees to be responsible for another’s debt if he or she should default on a loan obligation. A guarantor may be required to provide additional security.

Honeymoon Rate:

A low rate of interest for a short time at the start of some loans (“Honeymoon rate loans”), normally from 6 to 12 months up to 3 years. Also called an “Introductory Rate”.

Interest:

What you pay back in addition to the Principal – the amount charged for the use of the money you borrowed. Note, this is in addition to any fees and charges applicable to the loan.

Investment Property:

In this case, any properties you don’t live (or work) in yourself, but hope to make money off, like rental properties.

Lender:

Any institute that offers loans. Could be a bank, a dedicated home loan provider, or a Credit Union (like us!)

Lenders Mortgage Insurance (LMI):

Insurance taken out by the lender against the possibility that a borrower may default on their loan. The cost of this is passed on to the borrower. Lenders usually require LMI where there is a need to borrow more than 80% of the property’s price.

Offset Account:

An account linked to your home loan. For the purposes of calculating interest on your loan, the balance in your offset account is subtracted from the balance remaining on your home loan, and then interest is calculated on the result.

So, if you have a home loan of $200,000, and a linked offset account with $10,000 in it, interest on your home loan would be calculated as if your home loan were only $190,000.

Owner-Builder:

Someone who builds the house they intend to own – they’ll be pouring the concreting, laying the bricks, or at the very least supervising the construction personally.

Owner-Occupier:

Someone who lives in the house they own. They may or may not have built it themselves but they own it and live in it.

Packaged Home Loan:

A home loan bundled with other products from the financial institute, like credit cards, personal loans, or insurance. As part of the bundle these products are normally better-value than their standalone counterparts, such as the credit cards having lower interest or a higher limit than the institute’s standalone card. Package Home Loans might also be referred to as “Home Loan Packages”, “Bundles”, “Packs”, etc.

Principal:

The amount of money you borrow. Need to borrow, for example, exactly $256,660? That’s the principal you’ll borrow. Interest is calculated on this amount.

Redraw Facility:

A feature of some loans that allows you to “withdraw” the extra/additional payments you’ve already paid back into the loan. If this is a feature of a loan, you may need to first meet certain requirements, like paying off a certain amount, before you can redraw.

Refinancing:

Switching your current home loan for a new one.

Split Loan:

A loan where part of it is set at a fixed interest rate and part of it is set at a variable interest rate.

Variable Interest Rate:

An interest rate that changes. This means repayments on your loan can go up…or down, depending on how the rates change. This might also be called “Variable Interest”, a “Variable Rate”, or simply described as “Variable”. See also Interest and Fixed Rate Interest.

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