Loan Glossary: How To Read Between the Lines of Home Loan Jargon
From offset accounts to capital gains tax, here is your essential guide to home loan jargon explained.
Home loans are confusing. There is a lot of terminology used to explain them and for the first-time buyer it can seriously sound like a foreign language. Here are some of the terms and phrases you may come across on your property journey.
Annual percentage rate
This rate indicates the annual interest rate you will pay on your home loan. It does not include lender’s fees and charges; see comparison rate.
The break cost or break fee of a home loan is charged by some lenders if you choose to end your fixed-rate home loan before the term specified in the contract.
Capital gains tax
Capital gains tax (CGT) is a tax you pay when making a profit from selling your investment property. This tax does not apply to your own home, otherwise known as your principal place of residence.
The comparison rate represents the true annual cost of the home loan, including interest rate, monthly repayments and any ongoing or upfront fees charged by the lender. Comparison rates help customers compare loans over a set period of time.
Conditional approval, otherwise known as pre-approval, indicates that a lender has assessed and agreed to your home loan up to a certain limit. Conditional approval will demonstrate the amount which you are able to borrow.
A discharge or termination fee is paid when you finish paying the balance on a home loan or refinance with another lender.
Equity refers to the difference between the value of your property and the amount still owing on the home loan. You may be able to use your home equity for a number of purposes such as investing or renovating.
Also known as an application free, this refers to the cost of establishing a new mortgage. This is a one-off payment that varies depending on the loan. It may be waived on some products or special promotions.
Extra repayments refer to payments made above your minimum monthly repayments and can help to pay your loan off faster and save on interest.
A fixed rate home loan is one in which the interest rate is locked in for a period of time and your repayments wont change. Typically, this rate is fixed for a period of one to five years.
Interest in advance
This applies to investment loans. With an interest in advance home loan, you are able to pre-pay the following year’s interest, allowing you to claim it as a tax deduction in the current tax period.
An interest-only repayment allows you to pay only the interest portion of your home loan for a set period of time.
Lenders Mortgage Insurance (LMI)
Lenders Mortgage Insurance (LMI) is a type of insurance that protects the lender from financial loss if the borrower can’t afford to pay their repayments. Generally, a lender will require you to pay LMI if your home loan deposit is less than 20 per cent.
Loan to Value Ratio (LVR)
The Loan to Value Ratio (LVR) denotes the ratio of a loan to the value of the asset for which the loan is used. For a home loan, the LVR is simply the loan amount divided by the value of the property.
An offset account can be linked to your home loan. Money kept in the offset account will essentially “offset” your home loan balance.
The principal refers to the amount you owe on your home loan. It is reduced over time as you pay off your home loan.
Principal and interest repayment
In a principal and interest loan you will pay both the interest and a portion of the principal, which is the amount borrowed from the lender.
This refers to the asset that secures your home loan, generally the property that you are purchasing.
This type of loan can be split into two accounts and the interest charged may vary for each account.
A variable interest rate is a rate that fluctuates as market interest rates change.
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