10 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.

A redraw facility lets you make extra payments into your home loan to reduce your 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 monthly repayments. It’s called a redraw facility because your money isn’t locked away. If you need to take any of your money back, you can. 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.

 

3. Lenders Mortgage Insurance (or LMI)

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 Split Loan Calculator useful.

 

8. Principal and Interest.

 

A principal and Interest loan (also known as Principal 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.

Have you heard about our Home Knowns series?

Finding a home loan that meets your needs isn’t easy. To help, we’ve developed a home loan comparison tool that shows you how your loan repayments may change, depending on the type and size of the loan you choose.

Also, a Home knowns series that will equip you with tools and strategies to take your home buying skills to the next level. From open inspection to negotiating like a pro, you’ll receive handy tips to help you at every step.

 

Lending criteria apply to all loans, for full terms, conditions, fees and charges, please review our Financial Services Guide, Product Guide and Fees and Charges Guide. These guides are available here and will be provided at the time of acquiring the product or by contacting 13 25 85.

This information has been provided without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness, having regard to your objectives, financial situation and needs. All loans are provided by Beyond Bank Australia Limited, 100 Waymouth Street, Adelaide, SA 5000 ABN 15 087 651 143 AFSL/Australian Credit Licence 237856. © 2019.

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