Home Loan Terms Explained for First Home Buyers

20 Jul Home Loan Terms Explained for First Home Buyers

So you decided to jump aboard the real estate train and wanted to buy a home, but the process of securing a home loan can be intimidating.

Home ownership can be an exciting milestone in an adult life but the jargons and complicated terms that come with securing a finance can be a little too overwhelming. You might find yourself stuck with a term and you’ll hate to slow down the process just because you fail to learn what stamp duty means.

Knowledge is power, right? So if you wish to familiarise yourself with some of the home loan terms, here is a quick guide for you:

Comparison rate

Banks and lenders are legally obliged to include a comparison rate when advertising a loan interest rate. Essentially, a comparison rate is the “true” cost of a loan which includes the interest rate, fees and charges and displays a single percentage rate. The whole purpose of a comparison rate is to make it easier for borrowers to compare various loans from different lenders. It is important to take note that comparison rates only use one scenario, for example a $150,000 loan over 25 years. In order to get an idea of the comparison rate that applies to your loan, look at the comparison rate for the amount and term closest to the amount and term of your loan.

 

Conditional approval

Conditional approval means you have been pre-approved and a quick check on your eligibility of a loan has been performed and you are qualified to make mortgage repayments on the amount you have been pre-approved for. A pre-approval gives you an indication of the maximum amount you can borrow. By getting your pre-approval you have the power to negotiate with confidence. However, it does not guarantee loan approval. You will still need to go to secure the relevant documents that the bank is requesting for formal approval.

 

Equity

Equity is the difference between the amount your property is worth and the amount you owe on your home loan. For instance, your home is worth $800,000 and you owe $300,000, your equity is $500,000.  As you pay off your home loan, your equity increases. You can borrow against the equity in your home to buy an investment property.

 

Fixed Rate

The interest rate of a fixed rate home loan remains the same for the entire term of the loan, regardless of changes to interest rates.

 

Interest Only

Standard home loans require you to pay both the principal (home loan amount owed) and the interest charged by the lender for providing you with the loan. An ‘interest-only’ home loan, on the other hand, requires a borrower to pay only the interest on the mortgage through monthly payments for a fixed term. This structure requires the repayment of the original borrowed amount in a lump sum when the home loan period is complete or the property is sold.

 

Refinancing

Refinancing lets you change your home loan to suit your new circumstances.  It is always a good habit to have your home loan checked by a finance broker to see whether the original home loan you chose is still the most suitable option for you. The funds from the new home loan will be used to pay out your existing loan. It often comes from a different lender, but many people refinance with the lender they’ve been using for years. If you move to a new lender, that lender will take care of paying out your existing loan.

 

Settlement

After you’ve made an offer on a property and the lender has given you a final approval, settlement is where the lender makes the final payment to the seller and property is officially yours.

 

Split Loan

This type of loan allows you to split your home loan between a variable and fixed rate at a ratio of your choice, giving you the flexibility of two loan types. A home loan can be split to have one part at a variable rate, and the remainder at a fixed rate. It may be split 50% variable and 50% fixed, or some other ratio such as 60%/40%.

 

Stamp Duty

Stamp duty is a tax levied by all Australian territories and states on property purchases. This is based on the property purchase price, location and loan purpose. Consult your finance broker today to calculate your stamp duty.

 

Variable Rate

This is an interest rate on a loan that fluctuates over time depending on the cash rate decision set by the Reserve Bank of Australia (RBA). The obvious advantage of a variable interest rate is that if the underlying interest rate decreases, the borrower’s interest payments also fall.

 

Now that you have equipped yourself with some of the common home loan terms, go ahead and kick off your home loan application. Consult with me today!

 

Disclaimer:

Credit Representative (486927) is authorised under Australian Credit Licence 389328.

 

This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.