The ultimate guide to common home loan terms

If you’re a first-time home buyer, chances are there are a bunch of terms you’re not familiar with. When it comes to understanding home loans and navigating the whole home-buying process, it helps to have a good grasp of loan terminology. 

Here are some common terms, words and phrases you’re likely to stumble across during your property buying journey.

Amortisation

Amortisation refers to the gradual repayment of the amount borrowed, along with accrued interest, through regular payments over a specified period. As payments are made, the outstanding balance decreases, leading to a reduction in the overall debt until the loan is fully repaid.

Appraisal

An appraisal is the process of determining the fair market value of a property, typically completed by a real estate agent.

Appreciation

Also known as capital growth, appreciation refers to an increase in the value of your property over time. This can be due to a range of factors, including market conditions, improvements, renovations and economic conditions.

Borrowing power

Your borrowing power or borrowing capacity is a measurement of how much a lender is willing to loan you based on your financial circumstances.

Break costs

Charges incurred when you terminate a fixed-rate loan before the end of the fixed period.

Cash rate

Set by the Reserve Bank of Australia (RBA), the cash rate is Australia’s official interest rate charged on unsecured overnight loans between banks. Ultimately, it influences the cost of borrowing money in the economy. 

Comparison rate

This rate includes both the interest rate in addition to the fees and charges associated with the loan, providing a more accurate comparison between different loan options.

Conditional approval

Conditional approval provides an initial assessment by a lender of how much you may be able to borrow, based on your financial situation.

Contract of sale

A contract of sale is a legally binding agreement between a buyer and a seller outlining the terms and conditions of the sale of a property. 

Conveyancing

Conveyancing is the legal process of transferring property ownership from the seller to the buyer.

Cooling off period

A cooling off period is a specified period of time, typically a few days, during which a buyer of residential property in Australia can withdraw from a contract of sale without facing significant penalties. It’s worth noting that cooling off periods vary between states and territories and they don’t apply at auction.

Default

A default occurs when you fail to meet a mandatory condition detailed in your lending contract, like repaying your mortgage on the specified date.

Deposit

The initial amount of money paid by the buyer to secure the purchase of the property.

Discharge

When your mortgage is released from your bank or lender, either because you’re refinancing to another lender or because you’ve paid off your home loan in full.

Equity

Equity is the portion of your property that you own outright. It’s the difference between the market value of your property and the amount you owe on your mortgage.

Establishment fees

The fees charged by a lender to establish your home loan.

Exit fees

Charges imposed by the lender for paying off the loan early or refinancing to another lender.

Fixed rate

A type of interest rate that remains the same for a specific period, providing stability in repayments.

Formal approval

Formal or unconditional approval refers to the official confirmation that your home loan application has been approved by your lender.

Guarantor

A guarantor is typically a parent or close relative who offers up their own property as additional security to help you secure a home loan. As part of this arrangement, the guarantor agrees to take responsibility for your home loan repayments if you default on your mortgage.

Interest rate

The interest rate is the percentage charged by the lender for borrowing the principal amount.

Lenders mortgage insurance (LMI)

Insurance that protects the lender in case the borrower defaults on the loan. LMI is typically required for home loans with a deposit of less than 20%.

Line of credit

A line of credit is a type of loan that lets you access a predetermined amount of funds that you can borrow as needed. With a line of credit, you can withdraw funds up to the credit limit at any time, with interest only charged on the amount borrowed rather than the full loan amount.

Loan term

The period over which the loan will be repaid, typically ranging from 15 to 30 years.

Loan to value ratio (LVR)

The LVR is a percentage figure that represents the amount borrowed compared to the value of the property. Banks use this figure to determine the level of risk you pose as a borrower. Typically, an LVR of 80% or less is considered low risk.

Low deposit premium (LDP)

Similar to LMI, an LDP is a type of insurance that banks take out for borrowers with a deposit of less than 20% to protect themselves in the event the borrower defaults on their home loan. 

Mortgage

A mortgage is a legal agreement between a borrower and a lender where the borrower uses a property as collateral for a loan. In exchange, the borrower receives funds upfront and agrees to repay the loan over time with interest.

Offset account

An offset account is a transaction account linked to your home loan, where the balance can be offset against the loan principal, reducing the interest payable.

Principal

The principal is the amount of money you’ve borrowed from your bank or lender for your home loan. It’s also used to describe the outstanding loan balance that you still owe to the bank.

Redraw facility

A redraw facility is a feature that allows you to withdraw extra payments made on your home loan, providing flexibility in managing your finances.

Refinance

Refinancing is the process of replacing your current home loan with a new loan, either with the same or a different lender.

Repayment frequency

How often you make repayments. Typically, you can choose to make repayments weekly, fortnightly or monthly.

Security

Security refers to an asset, usually the property itself, provided by a borrower to a lender as collateral to secure a loan. 

Serviceability

Serviceability refers to your ability to pay off your home loan. Lenders assess your serviceability by taking your monthly income and subtracting your monthly household expenditure, including expenses, debts and liabilities.

Settlement

Settlement is the final step in the buying process. During settlement, ownership of the property is transferred from the seller to the buyer and all legal and financial obligations outlined in the contract of sale are fulfilled, including the transfer of any remaining funds. 

Split rate

A split rate home loan involves splitting your loan into two components: a variable portion and a fixed portion.

Stamp duty

Stamp duty is a state government tax on property transactions, payable by the buyer.

Top up

A top up involves borrowing money against the equity in your mortgage to increase your existing home loan.

Valuation

A formal assessment of a property’s value conducted by a Certified Practicing Valuer (CPV). It aims to determine the definitive value of the property, based on factors like location, condition, size and home features. Most lenders require a valuation to be completed during the loan application process to ensure the property's value aligns with the loan amount being requested by the borrower.

Variable rate

Variable interest rates fluctuate over time based on market conditions, affecting your monthly repayments.

Vendor

The vendor or seller refers to the person who is selling the property.

Need more info on home loans explained? We’ve got you covered with our extensive collection of articles and clips in our Learn Hub.

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This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.