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Home loan terms explained.

If you’re shopping around for a home loan, you’ve probably come across a fair few technical terms. What do they all mean? If you’re feeling confused, you’re not alone. We’ve put together a short and sweet explanation of 10 technical terms you need to know before you lock down your home loan.

1. Redraw facility.

redraw facility lets you access the extra payments you make to your home loan. By making extra repayments to your loan, you will be reducing the principal loan amount and the amount of interest you pay on your loan. It's a good option if you think you'll have extra cash once you've met your minimum repayment obligations. It’s called a redraw facility because your money isn’t locked away. If you need to take any of your money back, you can1. Bear in mind some redraw facilities will be subject to fees and a short wait for your money.



2. Offset account.

An offset account is a transaction account linked to your home loan. It’s called an offset account because it 'offsets' your home loan balance daily, meaning you’re only paying interest on the difference between your principal loan and the balance in your offset account. Like an everyday bank account, you can deposit your salary and use your account to pay bills or make purchases whenever you need to.

Learn more about our Mortgage Offset Account

3. Lenders' Mortgage Insurance.

Lenders' Mortgage Insurance (or LMI) is insurance banks take out to protect against the risk of not recovering the full loan balance if you (the buyer) default on your loan or become bankrupt. Banks will typically use LMI if the LVR calculation is above 80%. The cost is passed on to you in a one-off premium, calculated as a percentage of your loan amount. It’s good to remember that this insurance protects the banks not you – even though you’re paying for it. So try to avoid LMI if you can!

4. Settlement.

Settlement is the legal process where you become the new property owner. The process is managed by a settlement agent (usually your solicitor or conveyancer) and typically takes between 30 and 90 days. On settlement day, generally your agent meets with the seller’s agents to finalise the paperwork and pay the outstanding balance on the property.

5. Comparison rate.

A comparison rate represents the true cost of your home loan, because it factors in all the costs associated with your loan. It’s designed to let you compare home loans and see which is going to cost you less. The comparison rate is mainly based on the interest rate, but it also takes into account the amount you’re borrowing, how often you’re making repayments and the time it will take to pay the loan back.

6. Fixed and Variable rate. 

A fixed rate home loan has an interest rate that’s fixed for a specific period of time, typically up to five years. It means you’ll know exactly what your monthly repayments will be and you won’t be affected by interest rate changes. A variable rate home loan mirrors market interest rates. As interest rates rise and fall, so do your repayments. Both options have their pros and cons, it all depends on how much stability you need.

7. Split loan.

A split home loan combines the security of a fixed interest rate, with the flexibility of a variable rate of interest. Basically, a split home loan splits your loan into two parts – fixed and variable. You get to decide what portion of your home loan repayments are to be charged at a fixed rate, and what portion will fluctuate with market interest rates (variable). If this sounds like a good option to you, you might find our Home Loan Mortgage Calculator useful.

8. Principal and Interest.

A principal and Interest loan is your standard home loan. With this type of loan, your monthly mortgage repayments will be a combination of paying down your principal (the amount you borrowed) and interest payments on your loan.

9. Interest only. 

With an interest only home loan, each month you’re only paying off the interest on your loan. Because you’re not paying down your principal, your monthly payments will be lower. Whilst this might help you in the short term, bear in mind you won’t be paying any of the principal off and could end up paying more interest in the long run.

10. Bridging loan.

If you’re looking to buy a new home but haven’t yet sold your existing one, a bridging loan could provide the money to make your purchase. Bridging loans are granted under the assumption that your existing home will be sold soon and you’ll be in a position to repay the loan quickly.

11. Contract of sale.

A Contract of Sale is the document that contains all the terms and conditions, agreed between the buyer and seller, for the sale of the property. It will contain details such as the purchase price, the settlement period, the deposit amount, things included in the sale and whether adjustments will be made for things such as Land Tax and Council Rates. It’s a good idea to have this document reviewed by your solicitor or conveyancer before you sign it.

12. Loan to value ratio (LVR).

loan to value ratio (LVR) is the value of the loan you plan to take divided by the value of the property you are planning to buy. For example, if you are borrowing $600,000 to buy a property valued at $800,000 then the LVR is 75%. The LVR is important because lenders will often have LVR limits for loans they provide and loans with higher LVR’s may have higher interest rates and/or require Lenders’ Mortgage Insurance.


13. Stamp duty.

Stamp duty is a tax paid on the purchase of property in Australia. It’s calculated based on the price of the property, the State in which the property is located and sometimes the proposed use of the property.


First home buyer?

Buying your first home is an important life decision and our First Home Buyers Guide will take you through it, step by step.

We're here to help.