Deciphering the home loan jargon


 A brief explanation of home loan terms. Mortgage broker can speak your everyday language to understand some of the acronyms of the home loan.
home loan jargon

Home loan jargon is like the most boring game of Scrabble ever. There are so many terms to understand, and sometimes it can feel like bankers are making it hard on purpose.

You will get a triple word score every time to win a place on the property board.


Interest rate

This is like a two-letter word to get us on the board. The interest rate of your loan is the fee you are charged for borrowing money as a percentage of the loan amount. Even a difference of 0.1 per cent can save you plenty over the life of your loan, so it is worth gett in touch with a mortgage broker for the best deal.


Variable-rate and fixed-rate home loans.

You have a few options when you apply for a home loan.

A variable-rate changes with the market. If your loan's interest rate changes, your repayments will change, too. It is excellent for you when rates are low, but remember to plan for potential rises.

A fixed rate does not change for the duration of the loan. Great for stability, but you may be watching the market wondering.


Split loan

Think of it as the best of both worlds. When part of the loan has a variable interest rate, and the rest has a fixed-rate loan.


Honeymoon rate

A honeymoon home loan rate does not last forever – an introductory rate designed to entice you. Usually, it is lower than market rates, so the appeal is obvious. But those low payments typically only last six to 12 months before the whole loan reverts to a standard (or higher) rate.

Do not be tricked into a loveless loan – find a forever loan love.


Comparison rate

A comparison rate explains the cost of a loan, including all the extra and seemingly hidden fees and charges. When you use comparison sites to find a loan, for example, this figure will help you compare like-for-like without getting tripped up by shiny deals.


Interest-only loan

When you make your home loan repayments, money comes off the loan. In a standard principal + interest loan, your payment covers the interest and pays down the actual figure you owe (the 'principal').

With an interest-only loan, you only pay the interest. As a result, your repayments will be lower, but you will still owe the total amount of principal at the end of the interest-free period. Usually, the interest-only period is available from 1 - 5 years.


Offset account

This is a separate account where you put your savings in and reduce the interest charged on your loan. So if you have a $500,000 loan and $25,000 in your offset account, your interest paid will be based on $475,000.

So why not just put those savings towards your repayments? Because of holidays. Because of emergencies. Because of Black Friday sales. Because of life!


Redraw

If home loan lingo is scrabbling, the redraw is trying to use the Q without a U.

If you pay extra on your loan (above the typical home loan repayment), you can take extra money out again later. Sounds easy so far, but remember that using the extra cash from your redraw facility now will add that money back later on to your loan balance. Unfortunately, it is not free money.


Loan-to-valuation ratio (LVR)

As the name suggests, the loan-to-value ratio is your loan amount as a percentage of the property's value. For example, borrowing $340,000 to buy a $400,000 property gives you an LVR of 85 per cent. A lower loan-to-value ratio is better as it is a more negligible risk to the bank or lender if you default on your loan. This means you will also avoid the costs that come with a lower deposit, and you might even get access to a better rate.


Lenders Mortgage Insurance (LMI)

When you borrow most of the purchase price of your property, it can make lenders a bit nervous. If you borrow more than 80 per cent, you will probably also have to pay for Lenders Mortgage Insurance. That is a policy that protects the lender if you default on your loan.

It is an extra cost, but it can be your ticket in – so be aware of what is best for you.


Stamp duty

When you were young, this was licking stamps for your grandma. Now you are old, and it is the amount of tax payable when you buy a property. It differs from state to state, and in some cases, depends on the nature of the property itself, but you will need to keep it in mind when thinking about how much buying a house will cost. If you are a first home buyer, there may be stamp duty concessions or exemptions with property price caps.


Principal/capital

The principal is how much you owe on the property minus interest. This is the 'actual' amount you have borrowed and the balance on which interest is calculated. The faster you can pay this down, the less interest you will pay.


Deposit

Lenders want to see evidence that you can save – and getting a deposit together is a great way to do this. Your initial payment comes off the total value of the loan, so it is in your best interests to save as much as possible. It is standard to require a 10% deposit, but having more than 20% can save you a bunch in Lenders Mortgage Insurance.


Refinancing

This is the equivalent of swapping your current scrabble letters for new ones – because the loan you started with is not always the right one long-term. Refinancing is when you take out a new loan to replace the one you already have. Some people refinance to secure a better interest rate, while others are attracted to new and better features.


Guarantor

A guarantor is usually a family member but can be anyone who will provide financial security for your home loan.

So for some lucky first homeowners who cannot come up with the deposit, parents can step in to act as guarantors with the value of their property. It is a great backup, but money and family/friends can get tricky, so make sure the arrangement works for everyone. You may need to seek independent legal advice before proceeding.


Equity

Equity is the kind of word you hear at a dinner party and hope no one asks your opinion.

Equity is the difference between how much you owe and how much the property is worth. You may be able to access your equity to reinvest or make other large purchases at the lowest possible interest rate. Come to my dinner parties!


A final word

Home loans are complex beasts – and sometimes it feels like you have to be a banker to understand what it all means. So instead, talk to a local mortgage broker (in everyday language) and get ready to start picking your tiles.


This article is prepared based on general information. It does not consider individual financial objectives or needs and is not financial product advice, and the content quoted from ME Bank The Feed Blog.

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