Common home Loan & Mortgage Terms and Definitions

Aussies are known for being property-savvy. We know our townhouses from our apartments, and our strata titles from our freeholds. 

But that same savviness doesn’t necessarily translate to the mortgage-market.

While we’re generally across the difference between fixed and variable rate home loans, other terminology such as loan-to-value ratios and comparison rates can pass us by. 

But not for much longer. 

Your Mortgage has compiled some of the most common mortgage terms current and future home loan borrowers need to know, starting with five big ones that are commonly misunderstood.

Refinancing 

Whether you already have a home loan or you’re in the market for your first mortgage, it's integral that you’re across the basics of what refinancing is and what it can do for your financial situation.

To refinance means to swap mortgage products. It’s that simple. 

The most common reason a borrower would want to refinance is to secure a more competitive home loan – often one with a lower interest rate or additional features.

So, if you’re considering buying a property now, and you know your financial situation will likely improve in the years to come, remember that you’re not stuck with the first home loan product you choose. Refinancing will likely always be an option.

In the act of refinancing, your new lender will pay your old lender the amount of money you owe and issue you a new mortgage. 

Refinancing isn’t free, but many borrowers find that the cost of refinancing is quickly recovered due to the savings realised from doing so. 

If you’re interested in refinancing, check out Your Mortgage’s ultimate guide to refinancing your home loan.

If you’re in the market for a new home loan, or your first home loan, check out some of the market’s most competitive home loan products below.

Top home loan options available now 

Are you looking for your first home loan? Or maybe you're considering refinancing? Here are some of the top home loan deals available on the market right now. 

Loan-to-Value Ratio (LVR)

While the term loan-to-value ratio (typically abbreviated to LVR) might be foreign to many property enthusiasts, its meaning won’t be. 

A person’s LVR is basically a measure of how their deposit stacks up against their property’s value. Or, in other words, how much of their property purchase they can put down as a deposit and how much they plan to borrow from a mortgage lender. 

Let’s use an example.

Now you know what an LVR is. But why does it matter? 

Well, a borrower’s LVR is typically the measurement a bank or lender will use to assess how much risk they represent.

A borrower with a low LVR is generally deemed a low risk to a bank or lender, while another with a high LVR is often thought to be a higher risk. 

That’s because home loans are normally secured against the property they’re being used to purchase. So, if a borrower defaults on their loan, their lender will probably take ownership of the property and sell it to recoup its losses.

If a borrower has a large deposit, the bank or lender may expect to recoup all its losses in the event of a default. If a borrower with a small deposit defaults, however, their lender might be left out of pocket.

Typically, lenders allow a person to borrow as much as 80% of their property's value. Exceed that threshold, and a buyer might need to pay for Lenders Mortgage Insurance (LMI).

Lenders Mortgage Insurance (LMI)

Another key piece of mortgage terminology homebuyers would be wise to be aware of is LMI.

There’s often confusion around what LMI actually is. Is it insurance to help a buyer if they fall into hardship? Is it an extra fee a borrower is forced to pay for no reason? 

The answer is ‘C’; none of the above.

LMI is an insurance policy taken out to protect a lender. While a buyer will pay for LMI, it exists only to protect a bank or lender against losses realised if that borrower were to default on their loan.

Most lenders demand borrowers with an LVR of more than 80% pay for LMI, which can amount to thousands of dollars. 

Borrowers can generally choose to pay LMI upfront or roll it into their home loan.

If you’re purchasing your first home and don’t quite have a 20% deposit, you might be able to dodge the cost of LMI by utilising the Home Guarantee Scheme. 

Comparison rate 

There are many important factors to consider when comparing one home loan to another. 

Some current and future borrowers will focus on the interest rate on offer, while others might revolve their search around the features they most desire. 

Perhaps a more holistic way to pit one home loan product against another is to consider their respective comparison rates.

The comparison rate, also known as the Average Annual Percentage Rate (AAPR), melds a home loan’s interest rate with any fees or charges it demands, allowing those comparing products to consider their overall cost with one simple figure.

So, if a product has a suspiciously low interest rate and a notably high comparison rate, it’s likely that the bank or lender is charging hefty fees to those taking out that mortgage. 

But the comparison rate isn’t a fool proof measurement of the value a home loan product provides. 

For instance, it won’t take into account the use of features that could reduce the interest a person pays, such as offset accounts.

Offset accounts & redraw facilities

Two more mortgage terms that might have little meaning to average borrowers are offset accounts and redraw facilities. 

Not only are these two home loan features often misunderstood, they are also commonly confused for one another.

And no wonder. They both allow a borrower access to money that used to reduce the interest portion of home loan repayments. Though, they operate in particularly different ways. 

Offset accounts 101 

An offset account works in a similar way to a savings account, but the money that’s kept in an offset account saves a borrower interest rather than earning them interest.

Funds stored in an offset account are ‘offset’ against those owed on a home loan. For that reason, holding excess funds in an offset account can save a borrower interest.

Let’s bring Barry back in as another example.

Keeping that cash in his offset account could save him hundreds of thousands in interest over the life of his loan. 

But having an offset account isn’t always a great financial decision. Banks and lenders often charge borrowers extra fees to hold an offset account, and many of the lowest rate home loans on the market don’t allow offset accounts. 

It’s important that a borrower considers whether offsetting some interest will recoup the cost of holding an offset account. That might be particularly worth considering if only a portion of the funds kept in an offset account actually offset interest, as is commonly the case.

It’s also important to note that holding cash in an offset account won’t reduce the size of a borrower’s regular repayments. Though, it will reduce how much of those repayments goes towards interest and increase how much goes towards paying back the principal balance.

What you need to know about redraw facilities 

A redraw facility, on the other hand, allows a borrower to access any extra repayments they’ve made over the life of their loan.

So, if Barry had paid $1,000 extra each month on top of his regular home loan repayments, he could feasibly redraw $12,000 at the end of each year to help pay for his annual holiday. 

Since a person will only pay interest on the outstanding balance of their home loan, making extra repayments can reduce the interest portion of their repayments. 

While it's typically more hassle to access funds through a redraw facility than it is to pull them from an offset account, redraw facilities are generally free to have.

Indeed, most lenders offer them as standard on variable rate home loans.

Other common mortgage terms and their definitions

1. Amortisation

Amortisation is the process of paying off your home loan over time through regular repayments of both principal and interest.

Each payment gradually reduces your home loan’s principal balance until it's completely paid off.

Find your amortisation schedule using Your Mortgage’s home loan repayment calculator.

2. Arrears

Falling into arrears means you're behind on your home loan repayments.

Missing repayments can impact your credit rating and lead your lender to charge additional fees.

3. Break fee

A break fee is a penalty charged by your lender if you pay off your fixed-rate home loan early or if you refinance to another mortgage before the end of a fixed-rate period.

It's designed to cover any losses realised by the lender in the event of an early termination.

4. Bridging loans

A bridging loan is a short-term loan that helps you purchase a new property while you're still selling your existing one.

It can essentially ‘bridge the gap’ in a person’s finances while they’re between the two transactions.

5. Conveyancing

Conveyancing is the legal process of transferring ownership of property from one person to another.

Typically performed by a conveyancer or solicitor, conveyancing involves preparing and reviewing documents and ensuring everything is in order in time for settlement day.

6. Pre-approval

Being pre-approved means your lender has agreed, in principle, to lend you a certain amount of money to buy a property.

Getting pre-approval can give you a clearer idea of your budget and shows sellers you're a serious buyer.

7. Settlement

Settlement is the final stage in the property purchase process, where the ownership is legally transferred from the seller to the buyer.

It's the day that you’ll get the keys to your new home and start making mortgage repayments.

8. Valuation

A valuation is an assessment of a property's market value.

Traditionally, valuations were carried out by a professional valuers. However, these days, many lenders use analytics to assess the value of particular properties.

Lenders will use a property’s valuation it to determine how much they're willing to lend you, thereby ensuring the property's worth matches the loan amount.

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