Glossary of Terms
A contribution of extra funds paid in to a loan account, in addition to the minimum required repayments. These additional repayments reduce the loan term and interest expense. *Some fixed rate loans have restrictions on additional repayments.
Fees charged by the lender to set up the loan.
Penalty fees charged by the lender when a borrower terminates a fixed-rate contract before the fixed rate period expires/matures. The fee covers the bank for the “economic cost” associated with you paying out the loan early.
A loan that can be used when buying a new home before selling an existing home allowing you to own 2 properties for a short time until you sell and settle the existing home. Bridging finance is for a short loan term, usually no longer than 6 months.
An independent pre-purchase building inspection is highly recommended so that you can find out exactly what the seller does not want you to see and to ensure the building is structurally sound. A building inspection is best carried out by a qualified builder with PI insurance.
*When a property is for sale privately, a contract of sale can be signed subject to a satisfactory building and/or pest inspection.
A licenced real estate agent who acts on your behalf to find, negotiate and purchase a property for you.
The legal process for transferring ownership of property (land and real estate) from the seller’s name to the buyer’s name. You’ll need a conveyancer/solicitor when buying and selling property to deal with the legal side of the transaction.
The maximum amount a lender/credit institution will lend you based on your financial position.
A sum of money paid by the buyer as a first installment on the purchase of a property, of which the balance is payable at settlement. Deposits are usually a minimum of 5-10% of the total purchase price.
A fee charged by a lender to cover costs in relation to closing a loan account. Typically charged when a borrower repays their loan in full or when they move their finance to a different lender.
Discharge of Mortgage
A document signed by the lender and given to the borrower once a mortgage has been repaid in full.
The portion of an asset, house or company which is owned by you. Equity in your home = the value of your house less the amount borrowed against your home. (Ie. Equity = Asset- Liability)
First Home Owners Grant
A grant from the government which assists first home buyers to purchase their first home. Not all first home buyers are eligible for the grant. Grants vary from state to state. See http://www.sro.vic.gov.au/first-home-owner for details of the current grants available for First Home Buyers in Victoria.
An interest rate that applies to a loan at a set rate and for a set period of time (usually 1-5 years) regardless of fluctuations in the market. This guarantees interest repayments to remain the same for the fixed period. See ‘variable interest’ rate for more info.
Home and Contents Insurance
An insurance policy that combines cover against damage to a dwelling (ie a home) and its contents.
Interest Only Loan ( i/o )
Is a specified period of time (usually 1-5 years), where the borrower is only required to pay the interest expense on the loan. The borrower can make extra repayments on the loan especially if it is also variable. At the conclusion of the specified term, principal repayment begins. See ‘principal and interest’ for more info or watch this video on interest only loans.
An insurance policy that covers owners from financial losses in relation to the rental of their property. Covers fixtures and fittings owned by the landlord and rent defaults.
Evaluation and assurance from the bank of the amount they are willing to lend a potential borrower subject to them finding an appropriate property.
Loan to Valuation Ratio (LVR)
The ratio of the amount borrowed against the value of the security e.g. a $400,000 loan secured against a $500,000 property means an 80% LVR.
LMI – Lenders Mortgage Insurance
If you want to borrow a loan with LVR greater than 80% (see above), the bank considers this riskier to themselves as there is a higher chance the borrower will default on repayments. Therefore the lender insures themselves for taking on this risk and passes the cost on to the borrower. LMI is an expensive one-off payment however some banks will let you borrow up to 95% LVR which could mean purchasing the home of your dreams sooner. Watch our video for more info.
The amount a borrower is contractually obliged to repay every month in order to repay the loan within the agreed term. See ‘additional repayment’ for more info.
Is a transaction account (non-interest earning) that is linked to a home loan account. The balance in the account is offset daily against the outstanding loan balance thereby reducing interest payable on that loan. i.e. a $400,000 loan with $50,000 in offset means the interest expense is charged on $350,000. Watch this video for more info on offset accounts.
An pre-purchase pest inspection is an assessment of a home’s timber for termites, possible infestations and other pests. Many businesses offer a joint building and pest inspection.
Principal and Interest Loan ( p + i )
A loan set up whereby the monthly repayments consist of both principal (repaying the loan amount itself) and interest (expense charged on loan). See ‘interest only’ for more info.
Is a feature which enables borrowers to withdraw money they have contributed by way of additional repayments to their mortgage. It is important to know the conditions of the facility as there may be a fee associate with redrawing or a minimum/maximum re-draw amount.
Refinancing can mean a number of things for those with existing mortgages. It could mean changing lenders or negotiating with existing lender for a better loan structure and interest rate. The aim is to save money on existing lending. Refinancing can also be used to consolidate debt.
Using an asset as collateral to “secure” a loan until it is repaid in full. In the case of mortgages the bank often uses the property to secure the loan.
Relates to the structure and set up of one loan. Can be divided in to two or more portions, typically these portions have different interest rates i.e. fixed/variable.
State government taxes on the purchase of property. Check out our calculators to see how much stamp duty and government fees will cost on the purchase of property.
A property report carried out by the lender’s certified valuer. Required by most lenders in order to ascertain a property’s market value.
Variable Interest Rate
A rate that varies and is susceptible to changes in accordance with the market rates and economy. See ‘fixed rate’ for more info.
Any change to the structure, interest rates or repayment to an existing loan. ie. Switching from variable to fixed rate or switching from interest only to principle and interest repayments. A Lender can sometimes charge fees for this.