Home Loan Dictionary
A - Z
An amortized loan refers to a loan with equal periodic repayments made over the loan term, which includes both interest and principal. The goal of amortization is to gradually pay off the loan over time, with the balance decreasing as payments are made. This type of loan is common for mortgage loans and is structured in a way that the amount of each payment is sufficient to cover the interest due and also reduce the principal balance, thus leading to full repayment of the loan by the end of the term.
Basis points, also known as bps, is a unit of measurement commonly used to describe changes in interest rates. A basis point is equal to 1/100th of a percent, and is used to express the difference between two interest rates or the change in an interest rate over time.
For example, if the interest rate on a loan increases from 4.00% to 4.50%, this would be a 50 basis point increase. Similarly, if the interest rate on a loan decreases from 4.00% to 3.50%, this would be a 50 basis point decrease.
In finance and banking, basis points are often used as a way to communicate changes in interest rates in a standardized and easily understandable manner. This allows financial experts to compare interest rate changes across different loans, investments, and other financial products, and to make informed decisions based on these comparisons.
It's important to understand that while basis points are a useful tool for expressing changes in interest rates, they can also be somewhat abstract. For example, a 100 basis point increase in interest rates may not seem like a significant change, but it can still have a significant impact on the cost of a loan or other financial product.
A Bridging Loan is a short-term loan designed to "bridge the gap" between purchasing a new property and selling an existing one. This type of loan provides temporary financial support to buyers who need funds to purchase a new property before they are able to sell their existing one. The loan is usually secured against the buyer's existing property, and the loan term typically lasts several months. The purpose of a Bridging Loan is to provide the borrower with the necessary funds to complete a property transaction, without having to wait for the sale of their current property to close. Bridging loans are typically more expensive than other types of loans, due to their short-term nature and higher risk profile.
A Comparison Rate refers to a rate that includes both the interest rate and fees and charges associated with a loan. It provides a more comprehensive view of the true cost of a loan by taking into account not just the interest rate, but also the upfront fees, ongoing fees, and any other charges that may apply. The Comparison Rate is intended to make it easier for borrowers to compare the true cost of different loan products, as it provides a single rate that takes into account all of the costs associated with a loan. This can be especially helpful when comparing loans from different lenders, as it allows borrowers to make a more informed decision based on the total cost of borrowing, rather than just the interest rate. It's important to note that Comparison Rates are not the same as interest rates and may be higher or lower than the advertised interest rate, depending on the fees and charges included in the calculation.
Conditional approval refers to a preliminary or provisional approval of a mortgage loan from a lender. This type of approval is given based on the information and documentation provided by the borrower and is subject to certain conditions being met.
These conditions may include, but are not limited to:
- Proof of income, such as pay stubs, tax returns, and other financial documentation
- Proof of employment and job stability
- Verification of the borrower's credit history and score
- A property appraisal to determine the value of the property being purchased
- Proof of adequate insurance coverage for the property
Once all of the conditions have been satisfied, the lender will typically provide the borrower with a formal or final approval, which allows the loan to move forward to closing.
It's important to note that conditional approval is not a guarantee of loan approval. The lender still has the right to decline the loan if it determines that the borrower is unable to meet the conditions of the loan or if the property appraisal reveals issues with the property that would impact its value.
Conditional approval is often sought by borrowers when they have found a property they would like to purchase and want to make an offer, but want to make sure that they will be able to secure the necessary financing to complete the purchase.
A Conveyancer is a professional who specializes in the legal aspects of property transactions. Their role is to ensure that the transfer of property ownership from one person to another is carried out in accordance with the law and that all necessary documentation is prepared and filed correctly. Conveyancers are responsible for preparing and reviewing contracts of sale, conducting title searches, ensuring that taxes and other charges are paid, and managing the settlement process. They work with real estate agents, mortgage brokers, and other professionals to ensure that all aspects of the property transaction are handled smoothly and efficiently. In Australia, Conveyancers are required to be licensed and insured, and must adhere to strict ethical and professional standards to maintain their license. Hiring a Conveyancer is often a recommended step for individuals who are buying or selling a property, as they can help to ensure that the transaction is carried out correctly and that the rights and interests of all parties involved are protected.
The credit limit refers to the maximum amount of money that a lender is willing to lend to a borrower to purchase a home. The credit limit is determined by a number of factors, including the borrower's income, credit history, and the value of the property being purchased.
Lenders use a variety of methods to determine the credit limit, including evaluating the borrower's debt-to-income ratio, which is the amount of debt the borrower has relative to their income. If a borrower has a high debt-to-income ratio, the lender may choose to lower their credit limit, or decline the loan altogether.
The credit limit is not the same as the loan amount, as the borrower may choose to borrow less than the credit limit. This is common in situations where the borrower is able to make a larger down payment, which reduces the amount they need to borrow.
In some cases, the credit limit may be adjustable, which means that the lender may choose to increase or decrease the limit based on changes in the borrower's financial situation, such as an increase or decrease in their income.
It's important to remember that having a high credit limit does not necessarily mean that you should borrow the full amount. Borrowing more than you need can result in a larger loan balance, which can lead to higher monthly payments and a longer repayment period.
A Deposit refers to the upfront payment made by a buyer towards the purchase price of a property. It is a way for buyers to show their commitment to the purchase and to demonstrate that they have the financial means to follow through on the transaction. Deposits are typically made once the contract of sale has been signed, and can range from a few thousand dollars to several percent of the purchase price. In some cases, the deposit may be held in a trust account by a neutral third party, such as a conveyancer or a real estate agent, until the transaction is completed. The amount of the deposit, and the conditions surrounding it, can have an impact on the final sale price of the property, and may be a negotiating point between the buyer and seller. In general, a larger deposit can demonstrate a stronger financial position and may help to secure a mortgage loan, as it shows that the borrower has the ability to save and make significant financial commitments.
A Drawdown date refers to the date when the borrower can start using the loan funds that have been approved. It is the point in time when the lender releases the funds to the borrower, who can then use them for the purpose specified in the loan agreement, such as buying a house or making home improvements. The drawdown date marks the start of the loan repayment period and the borrower must begin making regular payments to repay the loan according to the terms and conditions agreed upon with the lender.
Equity refers to the difference between the current market value of a property and the amount of debt outstanding on it. It is a measure of the owner's financial interest in the property, and represents the portion of the property's value that is owned outright by the homeowner, without any outstanding loans or mortgages. In simpler terms, equity is the portion of the property's value that is considered the homeowner's equity and can be used as collateral to secure additional loans. Increasing equity can be achieved by paying down the mortgage, making improvements to the property, or by a rise in the property's market value.
Exit costs refer to the fees and charges that a borrower may incur when they choose to repay or refinance their loan before the end of the loan term. These costs can include early repayment fees, discharge fees, and break costs. Exit costs are designed to compensate the lender for the loss of future interest that would have been earned had the borrower continued to make payments according to the original loan agreement. The amount of the exit costs can vary depending on the lender, the loan product, and the circumstances of the repayment. In general, exit costs are higher for loans with a fixed interest rate, as these loans lock in the lender's expected income for a set period of time. It's important for borrowers to be aware of the potential exit costs when taking out a home loan, as these costs can have a significant impact on their financial position and may affect their ability to refinance or repay their loan early. Borrowers are encouraged to review the loan agreement and ask for clarification on any fees or charges that may apply before signing a loan contract.
Fixed Interest Rate
A Fixed Interest Rate refers to an interest rate that is set for a specified period of time and does not change, regardless of any fluctuations in the market. This type of interest rate is used for home loans and provides the borrower with the security of knowing exactly what their repayments will be for the agreed upon term. The term for which the interest rate is fixed can range from one to five years, or even longer, and at the end of the fixed term, the loan may revert to a variable rate, or the borrower may choose to refinance to a new fixed rate loan. Fixed interest rate loans can be useful for borrowers who are looking for certainty and stability in their repayments, as they provide peace of mind knowing that the interest rate will not increase during the fixed term. However, it's important to note that although the interest rate is fixed, other costs such as fees and charges may still change. It's also possible that the fixed interest rate may be higher than the current variable rate, so it's important to consider all of the factors involved when deciding whether a fixed interest rate loan is the best option for you.
A Guarantor refers to a person who agrees to be responsible for repaying the loan in the event that the borrower is unable to do so. The guarantor acts as a backstop for the lender, providing an added layer of security to the loan agreement. This type of arrangement is often used when the borrower has limited credit history or income, making it difficult to obtain a loan on their own. The guarantor is typically a close family member or a friend of the borrower, and must have a good credit history and financial stability. The guarantor assumes financial responsibility for the loan if the borrower defaults, and is required to repay the debt or face legal action.
An Introductory Rate refers to a promotional interest rate that is offered by lenders to attract new customers or encourage existing customers to switch to a different loan product. This type of rate is typically lower than the standard interest rate and is only available for a limited time, typically one to two years. After the introductory period has ended, the interest rate reverts to the standard rate for the loan. Introductory rates are often used to entice borrowers to take out a new loan or to refinance their existing loan, and can be a useful tool for reducing the overall cost of borrowing, especially for borrowers who are looking for a short-term solution. However, it's important to understand that an introductory rate is not the same as the ongoing rate, and that the true cost of borrowing may be higher once the introductory period has ended. It's important to carefully consider the terms and conditions of an introductory rate loan, including the length of the introductory period, the standard interest rate, and any fees or charges that may apply, to ensure that it is the right option for you.
Lenders Mortgage Insurance (LMI)
Lenders Mortgage Insurance (LMI) is insurance that protects the lender against the risk of default by the borrower. This type of insurance is required when a borrower does not have a large enough deposit to meet the lender's loan-to-value ratio requirements, or if the borrower is considered to be a higher risk due to factors such as a low credit score or a high level of debt. LMI is paid for by the borrower as a one-off premium, and the cost of the insurance is based on a number of factors, including the size of the loan, the loan-to-value ratio, and the borrower's credit profile. The purpose of LMI is to provide a financial cushion for the lender in the event that the borrower defaults on their loan, and to reduce the risk of loss for the lender. However, it's important to note that LMI does not protect the borrower, and that it does not provide any benefits for the borrower in the event of a default. It is a cost that is added to the overall cost of borrowing, and is an additional expense that should be taken into consideration when assessing the total cost of a home loan.
Loan to Value Ratio (LVR)
Loan to Value Ratio (LVR) refers to the relationship between the amount of the loan being sought and the value of the property being used as security for the loan. The LVR is expressed as a percentage, and is calculated by dividing the loan amount by the value of the property. For example, if a borrower wants to buy a property worth $500,000 and they have a deposit of $100,000, the loan amount would be $400,000 and the LVR would be 80% ($400,000/$500,000).
The LVR is an important consideration for both the borrower and the lender, as it provides an indication of the level of risk associated with the loan. Lenders use the LVR to assess the risk of the loan and to determine whether the borrower is eligible for a loan and, if so, the terms and conditions of the loan. Borrowers can use the LVR to understand how much deposit they need to save in order to purchase a property, and to determine which type of loan may be best suited to their needs. Lenders typically require a lower LVR for borrowers who are considered to be higher risk, and may require Lenders Mortgage Insurance (LMI) for loans with a high LVR. Overall, the LVR is a key factor in determining the cost and terms of a home loan, and is an important consideration for both borrowers and lenders when assessing the suitability of a loan.
An Offset Account is a type of transaction account that is linked to a home loan. The funds in the offset account are used to offset, or reduce, the interest payable on the loan. Essentially, the balance in the offset account is treated as though it were part of the borrower's loan balance, reducing the amount of interest that is charged on the loan.
For example, if a borrower has a loan balance of $300,000 and a balance of $50,000 in their offset account, they would only be charged interest on a loan balance of $250,000 ($300,000 - $50,000). This means that the interest charges are reduced, and the loan is paid off more quickly, which can result in significant savings over the life of the loan.
An offset account is a flexible and convenient way for borrowers to manage their home loan, and can be especially useful for those who have a fluctuating income or who want to be able to access their savings easily. However, it's important to understand that offset accounts may have fees and charges associated with them, and that these fees should be taken into consideration when assessing the overall cost of the loan. Offset accounts are a useful tool for borrowers who are looking to reduce the cost of their home loan and achieve their financial goals more quickly, and are an important consideration for anyone who is looking to take out a home loan in Australia.
Mortgage Fees are the costs associated with obtaining a home loan. These fees can include a range of charges, such as application fees, valuation fees, legal fees, settlement fees, and discharge fees. Mortgage fees can vary widely depending on the lender and the type of loan, and can add significantly to the overall cost of a home loan.
It's important for borrowers to carefully consider the mortgage fees when comparing home loan products, as they can have a significant impact on the overall cost of the loan. For example, a loan with lower interest rates may have higher fees, while a loan with higher interest rates may have lower fees. Borrowers should always compare the total cost of the loan, taking into account both the interest rates and the fees, in order to determine the best option for their needs.
In addition to the fees associated with the loan itself, borrowers may also need to pay additional costs such as stamp duty and conveyancing fees, which are associated with the purchase of the property. These costs can also vary widely depending on the state and the type of property, and it's important for borrowers to factor these costs into their budget when considering a home loan.
Overall, mortgage fees are an important consideration for anyone who is looking to take out a home loan in Australia, and it's important to carefully consider the fees associated with each loan product in order to determine the best option for your needs.
An Overdraft is a type of credit facility offered by banks and financial institutions that allows individuals to spend more than the balance in their transaction account. An overdraft is essentially a loan that is linked to an individual's transaction account, and can be used to cover short-term cash flow shortages or to make unexpected purchases.
With an overdraft, individuals can access extra funds when they need them, up to an agreed limit. The overdraft limit is usually based on an individual's credit history, income, and other factors, and can be increased or decreased by the lender as circumstances change.
Interest is charged on the outstanding balance of an overdraft, and the interest rate can vary depending on the lender and the individual's credit history. In addition to interest charges, overdrafts may also incur fees, such as monthly fees, transaction fees, and dishonour fees.
Overdrafts are a flexible and convenient way for individuals to manage their finances, and can be especially useful for those who have a fluctuating income or who need access to extra funds in an emergency. However, it's important to be mindful of the costs associated with an overdraft, and to only use the facility when necessary. Overdrafts should not be relied upon as a long-term solution to financial difficulties, and individuals should always strive to maintain a positive balance in their transaction account and repay their overdraft as soon as possible to avoid high interest charges and fees.
Portability refers to the ability of the loan to be transferred from one property to another without incurring significant costs or disruption. This feature is particularly useful for homeowners who are planning to move or upgrade to a new property. With a portable home loan, the borrower can take their existing loan to their new property, avoiding the need to reapply for a new loan and potentially incurring additional fees or interest charges. Portability allows the borrower to keep their current loan terms, interest rate, and repayment schedule, making the transition to a new property more convenient and cost-effective. It is important to note that not all home loans are portable, so it's essential to check with the lender to confirm if this option is available.
A Redraw is a feature offered by some home loan products that allows borrowers to access extra funds they have paid into their loan account. A redraw facility allows borrowers to withdraw any additional payments they have made into their loan account, up to a specified limit, without having to reapply for a loan or take out a separate loan.
For example, if a borrower makes additional payments into their loan account, they may be able to access these extra funds in the future if they need them. This can be useful for unexpected expenses, such as car repairs or medical bills, or for making additional investments.
To use a redraw facility, borrowers typically need to make a request to their lender, and the funds are then transferred back into their transaction account. Some lenders may charge fees for accessing the redraw funds, so it's important to check the terms and conditions of the loan before using this feature.
A redraw facility can be a useful feature for borrowers who are looking to make extra payments into their loan account, as it allows them to access these extra funds if they need them in the future. However, it's important to keep in mind that accessing the redraw funds can reduce the overall amount of equity in the property, and may increase the loan to value ratio, which can impact the borrower's ability to refinance or sell the property in the future.
Overall, a redraw facility can be a useful tool for borrowers who are looking to manage their finances and make the most of their loan payments, but it's important to consider the terms and conditions of the loan, as well as the potential impact on equity, before using this feature.
Refinancing is the process of switching from one home loan to another. Refinancing typically involves paying off an existing home loan with a new loan from a different lender, with the aim of reducing the borrower's monthly repayments, improving the loan's interest rate, or accessing additional funds.
Borrowers may choose to refinance their home loan for a variety of reasons, including:
- Lower interest rate: Refinancing to a loan with a lower interest rate can help reduce monthly repayments and save money over the life of the loan.
- Access to additional funds: Refinancing can provide access to additional funds, which can be used for home improvements, debt consolidation, or other expenses.
- Loan features: Refinancing can provide access to new loan features, such as an offset account, redraw facility, or a different loan term.
- Loan type: Refinancing can also provide an opportunity to switch from one loan type to another, such as from a fixed rate loan to a variable rate loan, or vice versa.
When refinancing, borrowers need to consider a range of factors, including the new loan's interest rate, fees, and terms and conditions, as well as the potential impact on their overall financial situation. Refinancing can be a complex process, and it's important to seek advice from a financial professional to determine if it is the right option for you.
It's also worth noting that refinancing can come with costs, such as break fees for exiting the existing loan early, and other loan establishment fees. Borrowers should carefully consider the potential costs and benefits of refinancing before making a decision.
Overall, refinancing can be a useful option for borrowers who are looking to save money, access additional funds, or improve the features of their loan, but it's important to weigh the costs and benefits carefully before making a decision.
A repayment holiday refers to a predetermined and agreed upon pause in the regular payment schedule of a home loan. During this holiday, the borrower is not required to make any payments towards the loan, but interest continues to accrue on the loan balance.
The idea behind a repayment holiday is to provide temporary relief for borrowers who may be experiencing financial difficulties, such as loss of income, high medical expenses, or other unexpected circumstances. By taking a repayment holiday, the borrower can reduce their monthly outgoings and focus on stabilizing their finances before resuming regular loan repayments.
It's important to note that while a repayment holiday can provide short-term relief, it will generally result in an extended loan term and an increased overall cost of the loan, as the accumulated interest will be added to the loan balance and will eventually have to be paid back. Borrowers should carefully consider the long-term implications of taking a repayment holiday before deciding to do so.
Borrowers who are interested in taking a repayment holiday should speak with their lender to determine if this option is available and what the specific terms and conditions are.
Split rate home loans
Split rate home loans are a type of mortgage where the borrower splits the loan into two or more separate portions, each with its own interest rate. This allows the borrower to take advantage of different interest rate types and secure a portion of their loan at a fixed rate while having another portion at a variable rate.
For example, a borrower may choose to have 70% of their loan at a fixed rate and 30% at a variable rate. This provides them with the security of knowing exactly how much their repayments will be for the fixed portion of the loan, while also having the flexibility to take advantage of any potential rate decreases for the variable portion.
Split rate home loans are a popular option for borrowers who want to hedge against the risks of rising interest rates but still want to take advantage of any potential rate decreases. However, it's important to consider the fees and charges associated with split rate loans and compare them to other loan options before making a decision.
Borrowers who are interested in split rate home loans should speak with a mortgage broker or lender to determine if this option is suitable for their financial situation and to understand the specific terms and conditions.
Stamp duty is a tax that is levied by the state and territorial governments on certain financial transactions, such as the purchase of property. This tax is typically paid by the buyer of the property and is calculated based on the value of the property being purchased.
Stamp duty is a significant cost that is incurred by property buyers and can range from a few thousand dollars for a low-priced property to tens of thousands of dollars for a more expensive property. The amount of stamp duty payable can vary depending on the state or territory where the property is located and the value of the property.
The purpose of stamp duty is to generate revenue for the government, but it also helps to regulate the property market by making it more expensive to purchase property, which can help to cool the market and prevent property prices from spiralling out of control.
It's important to note that there may be exemptions or concessions available for certain groups of people, such as first home buyers, and it's also possible to defer the payment of stamp duty in some cases. Borrowers who are interested in buying property should speak with a conveyancer or a financial advisor to determine the amount of stamp duty that they will be required to pay and to understand any exemptions or concessions that may be available to them.
Upfront mortgage fees are costs associated with obtaining a home loan that are paid at the beginning of the loan term. These fees can include a range of charges such as application fees, legal fees, valuation fees, and establishment fees.
These fees are separate from the ongoing costs of a home loan, such as interest charges and ongoing fees for services such as an offset account. Upfront mortgage fees are usually one-time charges that are incurred when the loan is first established, and they can add thousands of dollars to the cost of obtaining a home loan.
Borrowers should be aware of the upfront mortgage fees associated with their home loan and should consider these costs when comparing different loan options. Some lenders may offer special promotions or discounts on certain types of fees, and it's also possible to negotiate with lenders to reduce or waive some of these fees.
It's important to carefully review all of the fees and charges associated with a home loan before making a decision, and to compare the costs of different loan options to determine which loan is the best fit for your financial situation. Borrowers who are unsure about the upfront mortgage fees associated with a loan should speak with a mortgage broker or lender to understand the specific fees and charges that will apply.
Valuations refers to an assessment of the market value of a property, carried out by a professional appraiser or valuer. The valuation is usually required by the lender to determine the value of the property as collateral for the loan. The lender wants to ensure that the property provides sufficient security for the loan, and that it is worth at least as much as the loan amount being provided. The valuation process typically involves an inspection of the property, a review of comparable properties in the area, and a consideration of various market factors such as location, condition, and overall demand. The result of the valuation provides an estimate of the property's current market value, and the lender will use this information to determine whether to approve the loan and, if so, the loan amount.
Variable Rate Loan
A Variable Rate Loan refers to a type of home loan where the interest rate charged on the loan can fluctuate over time. The interest rate on a variable rate loan is tied to a benchmark rate, such as the Reserve Bank of Australia's official cash rate, and can move up or down based on changes to this benchmark rate.
The advantage of a variable rate loan is that borrowers have the flexibility to make additional repayments, redraw funds, or change their repayment frequency without incurring penalties. In addition, some variable rate loans offer features such as offset accounts, which can help borrowers to save on interest charges over the life of their loan.
However, the main disadvantage of a variable rate loan is that the interest rate on the loan can go up as well as down, which means that borrowers may have to pay more in interest charges if the benchmark rate increases. This can increase the overall cost of the loan, making it more expensive over time.
Borrowers who are considering a variable rate loan should consider their financial situation and their ability to make higher repayments if the interest rate increases. It's also important to understand the terms and conditions of the loan, including the interest rate and any fees or charges that may apply.
It's a good idea to compare the costs of different loan options and to speak with a mortgage broker or lender to understand the pros and cons of a variable rate loan before making a decision.
Speak to a mortgage broker today about refinancing to set yourself up to pay off your home faster and avoid paying unnecessary interest.