Looking to buy your first home? Scratching your head when it comes to home buying jargon? You’re not alone. To ease the pain, we’ve helped define common housing-related terms and have listed them from A to Z in our handy first home buyer dictionary.
Like many Aussies that are thinking about or are already in the process of buying their first home, you’re likely to have come across housing terminology that you’ve never had to understand before – up until now that is! Words and phrases such as guarantee, offset, Lenders Mortgage Insurance, and conditional approval can all sound like a bit of gibberish at first. But, understanding the meaning behind them could help take a little stress out of purchasing your new home.
That’s where our first home buyer dictionary can help. It’s a handy guide that includes a list of first home buyer terms and definitions, all in alphabetical order. It makes sense of home loan terms that you’ll come across and find yourself talking about during your home buying journey.
If you’re ready to learn, here are a few important phrases to get you started:
- An extra repayment you make towards your loan that’s above the minimum loan repayment amounts. Additional repayments may be available to access via a redraw facility.
- An inspection of a building that’s arranged by you, the buyer, and usually takes place during or before the cooling-off period on the house you intend to purchase. The inspection aims to review the condition of the property and highlight any defects and problems.
- A document from the lender that displays the amount they are likely to lend you. It's based on your financials, requirements and objectives, and is subject to final assessment and verifications.
- A portion of the total price of a property to be paid by you when contracts are signed and exchanged. Generally, at least 20% of the total property price is recommended as a deposit to avoid having to pay Lenders Mortgage Insurance (LMI). Additional savings will also be needed to cover fees and charges associated with buying any property, these fees can include stamp duty, solicitor/conveyancer costs, etc.
- A one-off fee that you may have to pay to the lender to cover loan application processing costs. Also known as an application fee or upfront fee.
- A fixed interest rate is when the interest on the home loan is fixed or locked in for a certain period of time. This means the interest rate and required mortgage repayments will stay the same for the period. This type of home loan allows for the certainty of repayments so budgeting for expenses can be easier and repayments won’t go up even if other interest rates increase during the fixed interest rate period. As opposed to fixed interest rate, a variable interest rate can change when the market interest rate changes. This means your repayments will also vary.
- Family guarantees can help applicants get into their home sooner because they may not need to save as large of a deposit and it can reduce lending costs e.g. Lenders Mortgage Insurance. If the borrower defaults on the mortgage repayments, the guarantor is responsible for repaying the borrower’s debt.
- A home loan package is a product that allows the simplicity of being able to combine certain financial products in a single and neat package. Borrowers can receive rate and fee discounts not just on their home loan, but on a range of products and services for an annual fee.
- Funds borrowed with the intention to gain a source of income rather than to buy a house to live in. This type of loan is mostly used for the purpose of a purchase, construction or refinance of a home that won’t be owner-occupied.
- This insurance covers the mortgage lender against the losses they may incur in the event that the borrower can no longer pay loan repayments (an event known as a ‘default’ on the home loan) and the lender takes possession of the secured property and suffers a loss when the sale amount does not cover the full amount of the loan outstanding. Lenders Mortgage Insurance is required by the lender when the loan to valuation ratio exceeds a certain percentage, normally around 80%. The fees associated with Lenders Mortgage Insurance are paid by the borrower at the commencement of the loan.
- A fee paid to the lender every month for the term of the loan, to cover costs or additional services available on the loan. If required, monthly fees are generally charged on the last day of each month. The value of the monthly fee and the charge date are outlined in the loan conditions and in your contract.
- An account that can offset up to 100% of the balance of the linked savings or transaction account against the balance of the linked loan. The balance of the linked account reduces the balance of the mortgage that incurs interest. Effectively you are only then charged interest on the difference between the total loan balance and the amount you have in the offset.
- A loan pre-approval means that a lender has agreed, in principle, to lend you an amount of money towards the purchase of your home but hasn't proceeded to a full or final approval. It means you know your maximum available funds so you can narrow your search, negotiate with more certainty, and bid with more confidence if you're going to auction.
- A facility that allows you to access extra repayments that you’ve made on your loan. Your extra repayments are funds paid into the loan above your contracted minimum repayment. Availability of redraw facilities and redraw limits differ across product types.
- The final step when buying a home. Settlement is the date the property ownership is legally transferred from the seller to you, the buyer. At settlement, often known as closing, all parties involved in the loan transaction sign the necessary legal documents and your mortgage loan responsibilities start.
- The length of the loan, also known as loan term. Most common term lengths are 20, 25, or 30 years but can differ with each lender.
- The assessment of the property value as determined by the lender or external valuer, often based on the property purchase price. The cost of the valuation is covered by the borrower and could be waived if a home loan package is secured.