Getting a Home Loan in Australia if you're living overs...
29 Nov 2023
If you're a first home buyer, you may feel overwhelmed by all the information there is to process when researching home loans.
The home buying process is full of jargon you probably haven't come across before. That's why we've put together a list of the terms and phrases you're likely to come across in your home buying journey.
A comparison rate is a rate that helps you work out the true cost of a loan. It reduces to a single percentage figure the interest rate plus most fees and charges relating to the loan. The comparison rate allows you to compare loans from different lenders to find out how much the loan will really cost you.
For your loan application to progress past preliminary approval, you will need to provide supporting documentation on your assets, income, expenses and liabilities. The lender will look at your ability to borrow funds and service the debt. If you are successful, you will then receive conditional approval. This is still subject to a property valuation and no changes in your financial circumstances.
Conveyancing is the legal term for transferring ownership of a property. Whether you're buying or selling, this process needs to be completed by a conveyancer or a solicitor, who handles all the legal aspects of buying and selling.
Passing a property to a new owner means a lot of work and a typical conveyancing transaction generally consists of three stages:
A home loan deposit is your initial contribution towards the purchase price of a property. Many lenders require a deposit of 20% of the purchase price of the home. Some lenders may accept lower deposits but you may need to pay Lenders Mortgage Insurance (LMI) which we'll cover below.
Equity is the difference between the value of an asset (such as your home) and the amount owing against it. For example, if your home is valued at $500,000 and you owe $400,000 on it, you have $100,000 of equity.
Fixed rate mortgages have an interest rate that is 'fixed' for a set period of time - often between one to five years. This means your repayments remain the same for that period of time. For budget-conscious households, fixed rate mortgages can offer peace of mind in knowing the repayment requirements will remain the same over the set period.
However, fixed rate home loans usually come with a higher interest rate than variable rate home loans.
A honeymoon rate (also known as an introductory rate) is a special low-interest rate applied to loans for an initial period to attract more borrowers. The honeymoon period when this lower rate applies usually varies from six months to a year. At the end of the term, the loan then reverts to the standard variable rate.
An interest-only home loan (IO) allows the borrower to delay the repayment of the loaned amount (the 'principal') and only pay the interest on the loan for a set period of time (typically between one and five years) before the loan reverts to a standard principal and interest loan (P&I). Interest-only loans are popular with investors as they can only claim a tax deduction on the interest component of their repayments not the principal component. Interest-only loans can have a higher total cost than principal and interest home loans because the loan's principal remains the same over the interest-only period, which can attract more interest costs.
Lenders mortgage insurance (LMI) is an insurance policy that covers the mortgage lender against the potential losses they may incur in the event that the borrower can no longer make their loan repayments (an event known as a default on the home loan).
LMI is not to be confused with mortgage protection insurance, which covers the borrower for their mortgage in case of death, sickness, disability or unemployment.
Your Loan to Value Ratio (LVR) is the value of a property in comparison to the amount of money being borrowed and is calculated as a percentage. LVR is used by lenders to assess the risk factor of a loan. The lower your LVR percentage, the less of a risk that loan is to a lender. For many lenders, 80% or lower (20% deposit or more) is generally considered to be a good loan-to-value ratio.
Buying off the plan is when you sign a contract to buy an apartment that is yet to be built.
Getting pre-approval is an important step in buying your home.
A loan pre-approval means the lender has, in principle, agreed to lend you an amount of money towards the purchase of your home, but hasn't proceeded to full or final approval. At loans.com.au, pre-approval means you have submitted an application to a lending manager and we have run a credit check to assess your credit record. Pre-approval can make you a more attractive buyer as it indicates you're serious about buying the property and your offer is less likely to be withdrawn due to a lack of financing.
It's important to note that pre-approval doesn't mean your loan is guaranteed to be approved.
The term principal and interest (P&I) refers to two components of your home loan repayments:
A home loan with repayments of both principal and interest is one in which you pay interest and also repay part of the amount borrowed (the principal) at the same time. With every principal and interest repayment you make, an increasing portion of the payment will go towards paying off the principal and a decreasing portion will go towards paying interest because you're chipping away at the principal loan amount while also covering the interest.
An offset sub-account is a sub-account linked to your home loan where you can put money (e.g. from your pay or savings) and use the money to reduce the interest payable on your home loan. With loans.com.au, you can redraw that money anytime you want, using your Visa Debit card attached to the account.
The benefit of putting funds into an offset sub-account is that we consider this money when we calculate your interest repayments. That is, when we calculate your home loan interest we reduce the amount of your home loan balance by the amount you have in your offset sub-account. So you’ll pay less interest which could help you pay your home loan off sooner.
Sometimes, the home loan you started out with isn't the right one long-term. Refinancing is when you take out a new loan to replace the one you already have. People can refinance for a number of reasons including to secure a better interest rate or to take advantage of better features.
Split home loans are a combination mortgage where part of the outstanding loan is charged at a variable interest rate and the other part is on a fixed rate for a set period of time.
Stamp duty is a tax imposed by state governments in Australia on the purchase of assets such as real estate. The stamp duty a buyer pays is based on the property purchase price, location and loan purpose. Some states offer free stamp duty or a reduced amount for first home buyers.
A property valuation is an estimate of the value of a property. A property valuation report is usually part of the home loan application process. Lenders will ask for a property valuation report from a certified valuer when you're purchasing a house.
It's important to note that a property valuation and a market valuation of the property are two different things. A market valuation is an estimate of the current price of the property in the market which is usually done by a real estate agent. A property valuation is performed by a certified valuer where they consider the home's value for a longer term. This is used by financial institutions to assess the value of the property to estimate how much money to lend you.
Variable rate home loans have an interest rate which can fluctuate over time, generally in line with the Reserve Bank of Australia's (RBA) official cash rate. Lenders can also make changes to the interest rate independently of the cash rate - known as out-of-cycle rate movements. Most home loans in Australia have a variable interest rate.
Variable rate home loans can be very flexible (depending on the product). Borrowers usually have the option of making weekly, fortnightly, or monthly repayments.
Deciphering home loan jargon can be tricky at first, especially when you're buying your first home. Now that you've had a rundown of some of the different home loan terms, kick off your home buying journey here.
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.