Home loans don’t have to be so confusing
AAPR: This stands for the Average Annual Percentage Rate – but it’s more commonly known as the ‘comparison rate’. The AAPR is the interest rate you’ll pay on your home loan when you add in the loan rate plus the loan’s fees and charges. This way, the AAPR gives you get a better picture of what a loan is really costing you, and it makes it a lot easier to compare the cost of different loans.
Agent: When you can’t be somewhere in person, you can ask another person to act on your behalf – someone who represents you in dealings with third parties. Real estate agents for example, act on behalf of the property owner to sell or lease a property.
Amortisation period: This just means how long the lender gives you to pay off your loan – it’s also referred to simply as the loan term.
Application fees: When you take out a home loan, some lenders will charge a one-off fee for setting up your loan. That’s the application fee.
Appraised value: This is an estimate of a property’s value given by a real estate agent based on current market conditions. It can vary between real estate agents, so if you’re looking to sell a property it pays to gather a few different valuations to get a feel for what your place is really worth if you’re going to list it for sale.
Appreciation: This refers to an increase in your property’s value over time.
Arrears: A payment that is overdue.
Assets: Things of value that you own – like your house, car, personal savings, and investments like a rental property.
Auction: This is a way of selling a property where buyers compete against each other – usually in public, by making their own individual bids on the place. The person who makes the highest bid usually wins the auction. However, the seller has the right to withdraw the property from sale if the highest bid hasn’t reached the ‘reserve’ price – that’s the minimum amount the owner is willing to sell the property for.
Body corporate: Also known as the ‘owners’ corporation’, the body corporate is made up of all the owners of a strata building (this includes apartments, villas and townhouses). The body corporate is a way of letting every owner have a say about how common areas of the property are managed and maintained.
Borrowing capacity: Also known as your borrowing power, this is how much a lender will offer you based on factors such as how much you earn, your living expenses and your credit record.
Breach of contract: This means not following through with the terms of a contract. It’s like breaking a written promise, where one person doesn’t do what they said they would or fails to fulfil their side of the deal.
Break costs: Also known as ‘early repayment costs’, this applies if you want to payout or switch out of a fixed rate loan before the fixed term comes to an end. How much you pay in break costs varies widely. It depends on your lender, how interest rates have moved since you first locked into a fixed rate, and how much of the fixed rate term is remaining. It’s a complicated calculation, and the best way to know how much you could be up for in break costs is by speaking with your lender or Aussie Broker.
Bridging loan: This type of loan is usually just temporary, and it is designed to bridge the cash gap that can occur when you’re buying a new home before you’ve sold your old place.
Building inspection: Before you commit to buying a property, it makes sense to check that the building is structurally sound. That’s exactly what a building inspection does. It’s carried out by a licensed professional, and can often be combined with a pest inspection, to give you an all-round view of the health of the building.
Building regulations: State governments have laws around property construction, and together with local council rules, these form the building regulations that builders, developers and even home renovators need to follow when constructing a home or completing renovations.
Building society: A type of financial institution that’s owned by its customers (also ‘members’) that offers banking and other financial services including home loans.
Capital gains: When your home, investment property or another asset rises in value, it has made a profit, which is referred to as a capital gain.
Capital gains tax: If you make a profit when you sell certain assets, and this includes an investment property, the profit can be taxable. Despite the name, there’s no separate capital gains tax (or CGT), it’s just part of your income tax. The profit is added to your other taxable income, and you pay tax at your personal rate. The good news is that the home you live in is usually free from capital gains tax.
Capped loan: This is a type of loan where the interest rate is semi-variable – it can’t go above a certain level but it can potentially drop to a lower rate. This can make a capped loan useful during periods when interest rates are rapidly changing or if your budget may be stretched if the loan rate jumped above a certain level.
Caveat: The word ‘caveat’ means ‘beware’, and when you come across a property that has a caveat, it’s a sign that someone else already has a legal interest in the place, and it may not be possible to sell the property without their permission. A caveat could also protect your interests as a buyer. For example, in the time between signing a contract and settling on the property, you’re not the legal owner of a property. But a caveat that puts your name on the title makes it very difficult for someone else to buy the place in the meantime. A good way to know if there is a caveat on a property is to check the title deeds of the place.
Certificate of Title: This is a formal record about a property – usually just a single page that really does look like a certificate. It shows the property’s ‘lot’ or ‘plan’ details from the local council as well as who the current owner is and other details, like whether the place is security for a home loan. When you buy a property, your home loan lender will hold onto the title deeds as security for the loan. So, it’s a very special day when your home is fully paid off, and the lender hands over the certificate of title.
Chattels: This is one of those old-fashioned legal terms that still appear in property transactions. A chattel is basically anything you own that can be moved, so when it comes to property, chattels typically include things like furniture, fridges, and washing machines – but also in some cases, dishwashers. Be sure to check the contract of sale to see which chattels – if any – are included in the sale.
Commission: This is the fee or payment made to a real estate agent who has helped you sell a property. Commission is based on a percentage of the property’s selling price, and in most cases, you can negotiate the commission rate you pay. No commission is payable when you’re buying a place.
Contract of Sale: This is an important document for both home buyers and sellers. The contract of sale sets out the terms and conditions that both the buyer and seller agree to including the price you have both agreed on, what’s included in the sale and any special conditions such as ‘subject to finance’. It’s often written in complex legal language, which is why it’s important to have your legal rep check the contract for any terms that may not be in your favour.
Conveyancing: This describes the process of transferring the ownership of a property from one person’s name (usually the seller) to another’s name (the buyer). Sounds simple, however it involves a fair bit of legal work, so while it’s possible in theory to do your own conveyancing, it’s generally a job best left to a professional conveyancer or a solicitor.
Cover note: Cover notes used to be offered by insurers as a type of temporary insurance policy. There’re no longer available in Australia, and instead, insurance companies offer a cooling off period of 14 days, so you have the option to change your mind if you find a better deal.
Credit: This just means money that you borrow, with a formal agreement on when you’ll pay the funds back and how much interest you may be asked to pay.
Credit union: This is a financial institution that works in a similar way as a regular bank offering savings accounts and home loans, except that it is owned by members (also the customers) rather than shareholders. The idea is that any profit goes back to members as improved services.
Creditor: A person or organisation (like a bank) that you owe money to.
Debtor: Someone who owes you money. It’s all about perspective though – if you have a home loan for instance, you are a debtor of the lender.
Default: A default means missing a payment for a loan or bill. So, if you miss a home loan repayment for whatever reason, you have defaulted on the loan. It’s serious stuff too. Not only can some loans come with penalty fees for a late payment, a default can be recorded on your credit record, potentially lowering your credit score and making it harder to access credit in the future.
Deposit: This is the down payment you make when you want to buy a property. Exactly how much you need as an initial holding deposit depends on a variety of factors including whether you’re buying at auction or by private treaty. A good rule of thumb is to ask the selling agent how much deposit you need to pay to secure the place. This can be anywhere from 5-20% of the selling price. However, this can be quite different from the deposit a lender will accept before offering you a home loan. As the minimum deposit varies between lenders, it’s worthwhile speaking to your Aussie Broker about how much deposit you need.
Deposit bond: A deposit bond can let you pay a deposit on a home even if your money is tied up elsewhere, for example, if your savings are locked in a fixed term deposit. The deposit bond works like a guarantee or insurance policy from a financial institution that a deposit will be paid to a seller. No money changes hands, instead, the full purchase price is paid at settlement.
Direct debit: An online (electronic) transfer of cash from one person’s bank account to another’s account.
Disbursements: Disbursements are charged by your legal rep for the various outgoings that go hand in hand with the conveyancing process of buying a home. They can include a variety of expenses such as title searches, council searches and certificates, and land tax searches.
Discharge fees: When you pay out a home loan in full you may be charged discharge fees to cover the lender’s admin costs.
Discharge of Mortgage: This is the moment all home owners aim for – the day when you make your final home loan payment, and you own the property debt-free. It can seem like a very distant goal when you first buy a home, but at some stage you will have paid off your home loan in full. A discharge of mortgage can also be needed at other times including if you sell your property or you refinance your current loan.
Disposable income: This is the income you have left over after tax has been taken out of your pay.
Draw down: This occurs when a lender makes loan funds available to you to buy a home. With some home loan loans, like a construction loan, the funds are drip-fed to you in a series of payments rather than as a single lump sum as building work progresses through various stages.
Easement: A right to use part of the land owned by another person or organisation. For example, a neighbouring property may have an easement over part of your land that gives them access to their own place, such as a shared driveway.
Encumbrance: An outstanding liability or charge on a property.
Equity: This is the formal term for the value of ownership you have in a property. If your home is worth, say, $600,000 and the balance of your home loan is $200,000, your equity in the property comes to $400,000.
Establishment fees: These are the fees charged by some – though not all – lenders to get your home loan up and running.
Exit or early repayment fees: Lenders can no longer charge a fee if you pay off a variable rate home loan early (this only applies if you took out the loan after July 2011). However, it’s a different matter if you have a fixed rate loan. Paying off a fixed rate loan in full before the fixed term ends can mean paying ‘break’ costs. How much you will be asked to pay depends on a range of factors including how interest rates have moved since you first fixed your loan rate.
Extra repayments: These can be your golden ticket to getting ahead with your home loan. The lender will set minimum regular loan repayments but by paying a bit extra, you can steadily reduce the loan balance, and this helps you pay off the balance sooner. Variable rate home loans usually allow extra repayments at no fee. Some fixed rate loans also allow extra repayments – though often with annual limits.
First Home Owner Grant: Also known as FHOG, this is a grant funded by state and territory governments designed to help first home buyers get into the property market sooner. The amount of the FHOG and the conditions for eligibility, vary from state to state.
Fittings: Items that are not intended to be removed from a property when it’s sold, for example carpets, mail boxes and appliances like a stove or hot water heater.
Fixed rate: An interest rate that stays the same for a set period, usually one to ten years. The fixed rate won’t change even if market interest rates rise, so it can be a handy option if you’re on a tight budget, but on the flipside, you won’t get the savings of lower repayments if rates fall.
Freehold: The most common type of property ownership in Australia, which gives the owner the freedom to sell, lease or renovate the place (within council guidelines) as they choose.
Gazumping: This is something for buyers to watch out for. It happens when your verbal offer to buy a property is accepted, but the owner then sells the place to someone else who offers to pay more. There are ways to protect against gazumping including having home loan finance pre-approved and exchanging contracts as soon as possible
Guarantee: An agreement, often by a home buyer’s close family member, to be responsible for repaying a loan if the borrower can’t – or chooses not to – keep up the repayments.
Guarantor: The person who agrees to be responsible for the payment of a loan if the actual borrower defaults or is unable to pay. Having a guarantor can be a way of buying a home with a small deposit because the guarantor uses the equity in their own home to provide additional security for your own loan.
Home equity: The value of ownership you have in your home. It’s worked out by subtracting the balance of the home loan from the market value of the property. If your home is worth, say, $800,000, and there is $200,000 left on your home loan, you have home equity of $600,000.
Home loan: Also known as a ‘mortgage’, this type of loan is used to fund a property purchase. The property acts as security for the loan, so the lender will hold onto the title deeds to the property until the loan is paid off in full.
Instalment: The regular loan repayment that a borrower agrees to make to a lender.
Interest: The amount charged for the money you borrow from a lender.
Interest only loan: This is a loan where the regular repayments are comprised only of loan interest – there is no repayment of the loan balance. Lenders usually only allow interest only payments for a set period, often one to five years. After this, the borrower may have to renegotiate another interest only period or start making principal plus interest payments.
Interest rate: The amount you pay to borrow money expressed as a percentage of the loan balance.
Introductory loan: A loan that starts out with a very low interest for an introductory period, usually six to 12 months. After this, the rate often rises to the lender’s standard home loan rate. You may see these loans described as discounted or honeymoon rate home loans.
Investment property: A property that will be rented out to tenants rather than being the owner’s home. An investment property can let the owner earn rent and potentially, a profit on the sale of the place.
Joint tenants: Equal ownership of a property between two or more people. If one party dies, their share in the place automatically passes to the survivor or survivors.
Lease: An agreement between a property owner and a tenant. It allows the tenant to live in the property (or use it for other purposes) for a set period in exchange for an agreed rent.
Lenders Mortgage Insurance (LMI): If you borrow more than 80% of a property’s value (in other words, your deposit is less than 20%), you’ll be asked to pay lenders mortgage insurance – also known as LMI. It’s a type of cover that protects the lender in case the borrower can’t keep up the loan repayments. It doesn’t protect the home buyer at all. LMI is a one-off payment, and the lender will organise cover – it’s not something that home buyers have to shop around for.
Line of credit loan: A flexible type of home loan where you can choose how much of the loan balance you’d like to access, and when.
Lump sum repayments: Extra one-off repayments made on your loan that can help you pay off the balance sooner.
LVR: This stands for ‘Loan to Valuation ratio’. It’s the percentage of your home’s value that you are borrowing. For example, if you are buying a property worth $500,000 and you have a deposit of $100,000, you need a loan of $400,000. This would mean your LVR is 80% (worked out as $400,000 divided by $500,000).
Maturity: The date when a debt must be repaid in full.
Maximum loan amount: The maximum amount that a lender will offer as a loan. It’s based on a variety of factors including your income, deposit, and the purchase price of the property you plan to buy.
Minimum loan amount: Some lenders set a minimum amount that they will lend for home loans.
Minimum repayment required: This is the amount set by the lender that you agree to pay each week, fortnight or month. You may be able to pay more, but you need to at least be able to pay the minimum.
Mortgage: Another name for a home loan.
Mortgage Broker: A home loan expert whose job is to help you select the home loan that’s right for your needs, complete the loan application on your behalf, and negotiate a competitive loan interest rate.
Mortgage offset account: A savings account linked to a home loan that can help you save on interest costs and pay off the loan sooner. No interest is paid on the money in the linked account. Instead, the balance of the offset account is deducted from, or ‘offset’ against, the balance of your home loan when monthly interest charges are calculated. If you have a loan of $300,000 for example, and $10,000 in the offset account, loan interest is based on a balance of $290,000. Your home loan repayments remain the same, so more of each repayment goes towards paying off the loan balance. It can be a great way to put your spare cash to work paying down your home loan.
Mortgage Protection Insurance: This type of insurance offers a payout if you can’t work due to illness or injury – or if you lose your job, helping you keep up with your home loan repayments even when the unexpected happens.
Mortgage registration fee: This is a small fee, usually less than $200 charged by state and territory governments to register a property as security for a home loan. It’s an extra expense to pay but the whole purpose is to let you see if anyone else has a claim on the property you are buying or refinancing.
Mortgagee: The financial institution that provides a home loan.
Mortgagor: The owner (or owners) of the property offered as security for a loan.
National Credit Code: A national set of rules that governs how lenders should behave when they offer credit, including home loans, to consumers.
Passed in: A property can be ‘passed in’ at auction if the highest bid is less than the seller was hoping to sell the place for. It happens when the bidding doesn’t reach the ‘reserve’ price – the minimum the seller will accept for the property.
Portability: This lets you keep going with the same home loan even if you sell one place and buy another. It can be useful if you are buying a new home but don’t want to have to go through the process of organising a new home loan on your nest property.
Principal: The amount owing on a loan, on which interest must be paid.
Principal and Interest loan: A loan in which the regular repayments include interest as well as a small repayment of the loan balance (or principal).
Redraw facility: This gives homeowners the option to withdraw any extra payments made on their home loan. It could be handy if you need cash in an emergency.
Refinance: To pay out your current home loan by taking out a new loan. It can be a way of getting a better deal on your home or freeing up equity for other personal goals like home renovations.
Reserve price: The minimum price a seller will accept for a property being sold at auction. When the reserve price has been passed, the auctioneer may announce that the property is ‘on the market’. This means that from this point the property will be sold to the highest bidder.
Searches: Information about individual properties is held by a variety of different bodies from the local council to the Land Titles Office. When you are buying a home, your legal rep will research all this information through a process called ‘searches’.
Security: When you take out a ‘secured’ loan, you give the lender the right to take possession of something you own in case you can’t pay off the loan. It’s a way of reassuring the lender that you will keep up the loan repayments. With a home loan, the property you are buying normally acts as security for the loan.
Settlement: When it comes to buying a home, there are generally two types of settlement:
Split loan: This describes a loan that is divided into two parts – one part that has a variable interest rate, and the remainder, which has a fixed interest rate.
Stamp duty: A state government tax that applies when you buy a property. Each state/territory charges different rates for stamp duty, and in some states, first home buyers enjoy discounts on stamp duty. To estimate the amount of stamp duty you may have to pay, use our stamp duty calculator.
Strata title: The most common type of ownership for townhouses, apartments and villas. In a strata plan, each property owner also owns a small portion of the overall property, including common areas such as external walls, windows, roof, driveways, foyers, fences, lawns and gardens.
Tenants in common: A type of ownership often used where two or more people (often friends or family) purchase a property together. Each owner is allotted ownership as a percentage of the property, and their share can be passed on in their Will rather than being automatically transferred to the other owners.
Term: The maximum time you are given to pay off a loan. A home loan for instance usually has a 25- or 30-year term.
Title deed: A formal document that identifies the owner of a property.
Transfer: A document registered with the Titles Office that confirms the change of ownership or a property.
Uniform Consumer Credit Code (UCCC): This legal framework for consumer lending was replaced in 2010 by the National Credit Code, which sets out a single set of rules for consumers using credit Australia-wide.
Valuation: A professional opinion about a property’s value provided by either an independent valuer – or by a lender’s own valuer, when you want to buy a place.
Variable rate: A home loan rate that goes up or down depending on how market interest rates move.
Variation: A change to any part of your home loan contract. This can include changing the settlement date, or the terms and conditions of the sale.
Zoning: This describes the way that your local council says various areas of land can be used.