Thinking about buying a house or just curious to see how it all works? Think of us as a one-stop shop for all your burning questions.
Buying a house may be one of the biggest decisions you’ll make. With a little help from our Lending Experts, we’ve compiled a glossary of useful home loan terms to help you along the way.
Here we’ve broken down some of the most common terms associated with purchasing a house.
Basis Points are a unit of measure used by lenders when talking about Interest Rates.
The value of 1 Basis Point is 0.01%; 10 Basis Points = 0.10%; 100 Basis Points = 1.00%, and so on.
If you hear the someone say, “standard rate of 5%, with a discount of 6 basis points”, what they are saying is that they are discounting 0.06% from the rate, giving a new rate of 4.94%
A comparison rate is a rate that helps you to understand what the true cost of a loan is.
It takes all fees, including set up costs, interest rates, early repayment fees, monthly fees and annual fees, and re-purposes them into a new interest rate, so it’s easier to plan for your repayments.
Conditional approval is a type of preliminary approval, or “pre-approval”, from a bank or lender, used to indicate how much you can borrow.
As the name suggests, it’s conditional, so don’t confuse it for a finalised, formal home loan. You will need to satisfy all requirements before having your home loan approved.
A house deposit is an amount that you personally contribute to the purchase of a house, generally acquired through saving.
The minimum deposit required is 5%, however most deposits are between 10% - 20%.
A holding deposit a sum of money – usually around $1,000 – that you secure an offer on a house. It’s paid to the seller through the real estate agency, and it has two uses: to show the seller that you’re serious about the property and to ensure the real estate agent doesn’t show the house property to any other prospective buyers.
A home loan is a loan you take out from a bank to purchase a house. They are typically for 80% - 92% of the total purchase price of the house, final amount depending on how much of a deposit you have. As buying a house is one of the most, if not the most expensive thing you’ll do, home loans are available to take out for up to 30 years.
Lenders Mortgage Insurance
Lenders mortgage insurance (LMI) is a type of insurance that protectors a lender (the Bank) against the risk of the customer defaulting and not repaying their loan. This means if you’re not able to pay the full cost of your home loan, the bank is protected.
Anyone who needs a home loan of 80% - 92% of the total purchase price (so anyone with less than a 20% deposit and above the minimum 5%) usually needs to take out LMI. It’s a one-off premium paid on your settlement date, and the premium amount is calculated on your Loan to Value Ratio (LVR).
The cost of the LMI varies depending on several factors including the loan amount and the loan to value ratio (LVR). See what LVR is below.
Loan to Value Ratio (LVR)
The Loan to Value Ratio (LVR) compares the amount of credit (the amount you are borrowing) to the value of any security. The LVR is expressed as a percentage and is calculated by dividing the amount of credit by the value of any security.
As your loan account balance reduces during the loan term, the LVR may change.
If you have a variable rate home loan, the interest rate is calculated using the LVR at your settlement date.
- A loan amount of $400,000 divided by a property value of $500,000 will result in an LVR of 80%.
Often confused with a home loan, a Mortgage is a Security Document between the lender (Mortgager) and the purchaser (Mortgagee). This Security Document stipulates that the property being purchased is held as security for the loan acquired to purchase it. Once the loan is paid off, then the lender will be removed from the Certificate of Title for the house, and the purchaser added to it.
An Offset Account is a type of account you open with your home loan that can be used in place of an Everyday Account.
The Offset Account offsets, or reduces, the amount of interest you pay on your home loan, by taking your cash on hand into account.
- You have a $500,000 home loan.
- You’ve just had your pay check clear, bringing the total balance in your Offset Account to $7,500.
- The daily interest on your home loan is calculated against a total amount of $492,500, which is the total home loan ($500,000) minus the amount in your Offset Account ($7,500).
Home loans will offer Full Offset or Partial Offset accounts. You can have up to 6 Offset Accounts, which comes in handy if you like to have one account for savings, another for personal expenses or bills. In the case of Full Offset, all accounts will be combined into a Total Offset Amount.
This is the process you go through to get conditionally approved for a home loan. This process is the real deal and once you’ve obtained one from the bank you’ll be ready to bid at auction.
Pre-qualification will give an indication of what price tag you should be looking for in the market. This acts as guide and is not a formal agreement with you and the bank. You’ll need to get pre-approval if you want to bid at auction.
Home Loans can come with what is called a Redraw Facility. It is a fee-free service that allows you to access additional repayments you’ve made over the lifetime of your loan.
- You have a $500,000 home loan and your monthly repayments are $2,500
- Each month for the last 6 months you’ve paid an extra $200 into your home loan
- Using the Redraw Facility, you’ll be able to redraw $1,200 from your home loan
- You don’t earn interest on any additional repayments, but it lowers the interest you pay on your home loan.
The Settlement Date is the day you finalise the purchase of a house, as negotiated in the Contract of Sale. On the Settlement Date, funds for the purchase of the house will be transferred to the seller, and the purchaser will pay Stamp Duty and Mortgage Lender’s Insurance if applicable.
Stamp Duty is a state tax imposed on specific purchases, such as houses and cars. The tax amount depends on the value of the property you are purchasing, and whether you’re a first home owner.