Buying your first home can feel like you’ve stepped into a world where everyone speaks a foreign language. Use this jargon buster to look up terms and phrases you may come across along the way.
You can also talk to one of our Finance Circle Group First Home Coaches. They’re fluent in home loan gibberish and can support you through the home buying process – from start to finish.
– A –
annual percentage rate
This is a rate that indicates the annual interest rate you will pay on your loan. Unlike the comparison rate, the annual percentage rate excludes the lender’s fees and charges.
First Home Finance Coach
An First Home Finance Coach is a professional who will support you at every stage of the home-buying journey. They’ll help you understand property values, bank jargon, the purchase process, as well as settlement. This can be a broker, banker or a financial adviser.
Approval in Principle
This is an indication from a lender that they will be willing to lend you a certain amount of money, subject to specified conditions.
It’s important to know that Approval in Principle is not a guarantee that your loan will be fully approved. The lender will only approve the loan if certain conditions are met. For example, Approval in Principle is usually subject to the lender’s own valuation of the property.
There are likely to be other conditions too.
Generally, presuming that your circumstances don’t change, your pre-approval will last for around three months. This may differ from lender to lender.
To find out more, contact our team at Finance Circle Group.
This is an increase in a property’s market value. It’s the opposite of ‘depreciation’, which is a fall in market value of the property.
– B –
This is an organisation that’s in charge of managing and maintaining common areas in a multi-dwelling property. We’re talking about things like apartment blocks and groups of units.
This type of property may have shared driveways, parking areas, stairwells, or lifts. It’s the body corporate’s job to maintain these shared areas.
Generally speaking, when you buy an apartment or unit, you automatically become a member of the body corporate. Being a member means you have certain legal and financial duties. You may also have to pay fees to help cover the costs of maintaining the common body corporate areas.
Borrowing capacity or Borrowing power are interchangeable terms. They refer to the amount that a lender is willing to loan you, based on their rules and risk appetite, and your overall financial circumstances.
Put simply, these are costs you may need to pay if you terminate a fixed rate home loan early. This may happen if you repay your loan in full or in part, or refinance your loan before the end of the agreed term. Be aware – break costs can be significant.
The lender should be able to give you an estimate of the likely cost, on the day that the early repayment occurs.
Some banks use the term ‘early repayment cost’ instead of ‘break costs’.
This is an examination of a house to find out whether it has any serious defects or structural problems.
Many buyers pay for a building inspection before agreeing to buy a property. The idea is to get a heads up on any serious problems with the house that may require substantial repair work. Once the inspection is complete, the buyer can make an informed decision on whether to proceed with the purchase.
Generally speaking, building inspections should be carried out by an appropriately qualified professional.
These are laws designed to ensure buildings are safe and liveable.
Building regulations usually specify the minimum standards a building has to meet in terms of its design and build quality. They may also include processes that need to be followed during design and construction, among other things.
Building regulations differ depending on the state or territory.
capital gains tax
Capital gains tax (CGT) is a tax you may have to pay when you make a profit from the sale of a property.
Generally, you won’t have to pay CGT when you sell the home you live in. You may have to pay CGT if you sell an investment property.
Check the Australian Taxation Office website for more info on CGT.
Sometimes, a person other than the owner may have a legal interest or claim over a property. A caveat is a legal notice placed on the certificate of title (refer below) that warns a potential buyer or lender about that person’s claim. When a caveat is in place, it may prevent the property from being sold until the claim has been resolved.
It’s important to seek legal advice on why a caveat may need to be put in place, or how to have one removed.
certificate of title
This is a legal document that identifies a property’s registered owners. It should also include details of any mortgagees (refer below) as well as legal notices such as caveats (refer above).
You’ll hear this one in the media quite a lot. The clearance rate is the proportion of properties that are successfully sold at auction in a suburb or region, within a certain period.
Clearance rates are usually expressed as a percentage. For example, let’s say 100 properties are put up for auction during the month of March, but only 80 are sold. The clearance rate for March would be 80%.
There are countless types of home loans out there, and each of them may have different interest rates and fees. It can get tricky to compare the cost of each one over the life of the loan. That’s where the comparison rate comes in.
The comparison rate includes interest as well as lenders fees and charges that apply for the life of the loan. It presents these as an annual percentage rate to make it easier to compare the cost of loans across different lenders.
Generally speaking, this is the same thing as Approval in Principle (refer above).
This is an offer to buy a property if certain conditions are met.
If the seller accepts the offer, you may be legally required to follow through and buy the property once the conditions are met.
If the conditions aren’t met, talk to your lawyer or conveyancer (refer below) about what to do next.
These are loans designed for people who are intending to pay a builder to construct their home.
A construction loan lets you access your funds as the building work progresses. This is important because builders usually require part payment at specific stages of the building work.
contract of sale
This is a written agreement between a buyer and seller of a property. It’s usually includes important contractual terms relating to purchase price, settlement (refer below) date, and fixtures and fittings included in the sale.
Generally, the contract of sale also describes the condition the property needs to be in at settlement. When it comes to contracts of sale, it’s usually a good idea to seek a review from a conveyancer or lawyer to help you understand the terms and conditions of the contract.
Transferring ownership of a property isn’t quite as simple as handing over the cash and taking the keys. There’s a bunch of legal and admin tasks that need to be done beforehand. ‘Conveyancing’ is the term used to describe these tasks.
It usually includes things like:
- preparing and lodging necessary legal documents
- checking any restrictions on the property title
- liaising with your lender
- representing you on settlement day.
Most people use a conveyancer or solicitor to do these things for them.
For more info, read our article on property settlement.
Buying a property usually involves signing a contract of sale.
Generally, when you sign a contract of sale, you’re legally bound to follow through with the purchase – but there are some exceptions.
One possible exception is a ‘cooling off period’. This is a set number of days during which you may be able to cancel the contract of sale after you’ve signed it. If you do this, you may have to pay the seller a termination fee, depending on the terms in the contract of sale.
It’s important to remember that the rules for cooling-off periods may differ depending on the state or territory and the nature of the sale. For example, there is generally no cooling-off period when a property is sold via auction process.
Cooling-off periods are a legal requirement in most states and territories. The contract of sale must include information about the cooling-off period. Make sure you talk to your lawyer or conveyancer to make sure you understand how cooling-off periods work in your state or territory.
Buying a property involves signing a contract of sale. When you do this, you may also need to pay the seller a deposit. But what if your money is tied up in an investment or term deposit?
A deposit bond may address this problem for you. Basically, it’s a substitute for cash that can be used to pay the deposit – just be aware that some sellers don’t accept them.
A deposit bond may be called by different names depending on the lender (e.g. deposit guarantee).
This is another name for deposit bond.
These are costs and fees that must be paid during the conveyancing process. For example, the relevant government body may charge a fee to provide your conveyancer or lawyer with necessary information about a property’s title.
These fees are generally passed on to you. You’ll have to pay them on top of your conveyancer’s or lawyer’s fees.
When you choose a conveyancer or lawyer, make sure you ask them about disbursements and an estimate of the likely cost.
There are certain costs involved in discharging a mortgage. Usually, your lender will pass these on to you in the form of a discharge fee.
discharge of mortgage
Once a home loan has been paid in full or refinanced, there are certain legal tasks that will need to be performed.
- If the home loan has been paid in full, the borrower may want the lender’s mortgage notice to be removed from the property’s title.
- If a property owner refinances the home loan, the new lender will need the mortgage notice to be changed.
Updating the property’s title involves submitting paperwork to the relevant government body. The process and time frame may vary depending on the state or territory.
Drawdown or Settlement
If your home loan is approved, your lender won’t simply pay the cash straight into your bank account for a property purchase. Instead, they’ll release the funds to the seller on settlement day. The release of these funds is known as ‘drawdown or settlement’.
early repayment cost
Please refer to break costs.
Equity is the market value of your property, minus the amount of your loan you still have to repay.
- if the market value or your home is $500,000
- and you still owe $300,000 to your lender
- this means you may have up to $200,000 in equity. However, most banks will lend up to 80% of the property value. Therefore, you will have additional $100,000 that you can borrow as your equity. (Value at $500,000 x 80% = $400,000. $400,000 less current loan $300,000 = available to borrow $100,000).
This is a fee you may be charged when your home loan is set up by your lender.
Your home loan agreement will state the minimum repayments you are required to make each month. Payments made over and above this amount are referred to as ‘extra repayments.’
First Home Owner Grant (FHOG)
Yes it’s true – the government gives eligible first home buyers a grant to help them buy their first home. It’s called the First Home Owner Grant (FHOG), but it works differently depending on the state or territory in which you live.
For more details on how it works, read our article on FHOG. It is always recommended to refer to government sites for most update information as the the grants may change from time to time. Alternatively, feel free to drop us an email on email@example.com for an update.
This is a rate of interest that stays the same for a certain period of time – generally between 1 to 10 years. It’s different to a variable rate, which may go up or down over time.
This is a person who agrees to help you get a home loan. Generally, they’ll do this by agreeing to take on some of the responsibility if you fail to pay off your loan.
Here’s how it works:
- Your guarantor will put forward some property as security for your loan.
- If you default on your loan, your lender has the right to sell your guarantor’s property to recover money still owing.
Just to be clear – guarantors accept some pretty serious legal obligations. If you default on your home loan, the lender may recover outstanding amounts from your guarantor.
You’ll need to think it over carefully before deciding to go down this path with a family member. We recommend that a guarantor gets independent financial and/or legal advice to help them fully understand the risks of entering into a guarantee.
HEM – Household Expenditure Measure
The Household Expenditure Measure (HEM) plays a crucial role in the assessment of home loans in Australia. It’s a benchmark used by lenders to determine the living expense allowances of borrowers based on various factors such as household size, income, and location.
HECS = Higher Education Contribution Scheme
This is a type of loan you take out as a university student to pay your contribution of your university fees.
HELP = Higher Education Loan Program
This is the overall program that provides loans to eligible students (whether at TAFE, college or university).
Both HECS and HELP loans are considered a liability for a loan application. Repayment calculations can be checked here – https://www.studyassist.gov.au/paying-back-your-loan/loan-repayment
interest in advance
Some home loans let you pay a year’s worth of interest in advance. There may be tax advantages in doing so, depending on your financial circumstances.
Generally, this is an option on fixed rate residential investment property loans only. We highly recommend seeking accounting or financial advice.
Some loans will have a period in which you’ll repay the interest charges only – you won’t pay back any of the principal. This period is generally up to five years.
Once the interest only period has ended, the loan usually will reverts to principal and interest repayments – meaning your repayments will increase.
This is someone who specialises in accurately marking out a property’s boundaries. It’s pretty important stuff – they’re the ones who determine where buildings and fences can legally be built.
Lenders Mortgage Insurance (LMI)
These days, most lenders won’t give you a home loan if your deposit is less than 20% of the lender-assessed value of the property – but LMI could be a way around this.
LMI protects your bank or lender in the event that you default on your home loan and there is a ‘shortfall’. A shortfall happens when the proceeds from the sale of your home are not sufficient to cover the outstanding amount you owe to your lender.
If this happens, your lender may be able to recover the shortfall from the LMI provider – but the LMI provider may still try and recover the shortfall from you. In other words, LMI protects the lender – it doesn’t protect you at all.
There are a few more things worth knowing, so we’ve written an article with more detail on how LMI works.
Loan to Value Ratio (LVR)
You’re probably going to hear this term a lot. Loan to Value Ratio (LVR) is the amount you need to borrow, calculated as a percentage of the lender-assessed value of the property.
The ‘lender-assessed value’ is your lender’s valuation of the property. This may be different to the purchase price.
Let’s break it down a bit more.
- Let’s say your lender values the property at $500,000.
- Let’s also say you have a $100,000 deposit (excluding transaction buying costs).
- This means you need to borrow $400,000 to buy the property.
Your LVR would be calculated like this:
$400,000 ÷ $500,000 = 80%
In the above example, we’ve simplified things by leaving out some of the fees and costs you may have to pay.
Getting your head around LVR is pretty important, so it’s worth learning more. Read our article explaining how LVR works and how it could affect you.
maximum loan amount
This one’s pretty straight forward – it’s the limit on how much a lender will allow you to borrow. Your lender will come up with this figure based on a few things, including your income, living expenses and other debts.
minimum repayment amount
This is the minimum amount you need to repay on your home loan each month. The details will be in your home loan contract.
This is a fancy name for the bank or lender that’s providing you with a home loan. They’re called the ‘mortgagee’ because they hold a ‘mortgage’ over your home.
When a lender has a mortgage over your home, it usually means that they have the right to sell it if you default on your home loan.
This is someone who takes out a home loan. When you’re a mortgagor, your lender usually has the right to sell the property if you default on your home loan.
This is a legal term that’s often used to describe home loans, but there’s a bit more to it than that.
Under a mortgage, the property you purchase is used as security for the amount of money you borrow. This means the lender may have the right to sell the property
This is the same thing as an offset account.
mortgage protection insurance
Where a borrower holds this insurance, it can help them with their repayments in the event of death, sickness, unemployment or disability.
This is a tax deduction you could get if you own an investment property. Here’s how it works:
- Let’s say you take out a mortgage to buy an investment property, which you then rent out to some tenants.
- Let’s also say your mortgage repayments are $350 per week, but you only get $300 in rental income.
- That leaves you $50 out of pocket.
- Under negative gearing, you could claim the $50 as a deduction against other income you receive in the same financial year.
If you’re thinking about negative gearing, chat to your accountant or financial advisor for more info.
NMS (Net Monthly Surplus)
NMS Is your net income minus your total monthly living expenses. It is then divided by your current debt and the monthly payment amount of the home loan you want to apply for. Each lender has their own criteria for the NMS, but they are usually similar. This determines overall the amount you have of additional spending per month.
This is an account that’s linked to your home loan. The money in your offset account is ‘offset’ against your home loan balance.
Here’s how it works:
- Let’s say you take out a $400,000 home loan.
- You then deposit $50,000 in your offset account.
- You’ll now be charged interest on $350,000, instead of the full $400,000.
- This will happen for as long as the $50,000 stays in your offset account.
This offset feature is generally only available on variable rate loans. It may be available on some fixed rate term loans.
off the plan
This means purchasing a property before it’s been built. Because it doesn’t exist yet, you can’t inspect the physical property. Instead, you’re buying based on what’s in the plans.
This is another term for Approval in Principle (refer above).
Simply put, this is the amount you owe on your home loan.
Usually, the principal amount gets smaller over time as you pay off your home loan.
principal and interest repayment
Under this kind of repayment, you’ll pay the interest charges, as well as a portion of the principal. The principal is the amount you borrow from your lender.
This relates to how much your property is worth. Lenders often talk about the ‘assessed value’ of your property, which is your lender’s valuation of your property. Valuations are usually done by a valuation specialist.
Some home loans let you access the extra repayments you’ve made on your home loan. This is called a ‘redraw facility’.
Here’s how it works:
- Let’s say your minimum repayment amount on your principal balance is $1000 a month.
- In November, you pay back $1500 – that’s $500 extra than your minimum repayment.
- At a later date, you may be able to access and withdraw the extra $500 that you’ve repaid ahead of schedule.
Any amount in your redraw facility will reduce the balance that you owe to your lender. The balance will increase if you withdraw funds from your redraw facility.
Having a redraw facility may help you reduce your interest payments, but they’re not available on all home loans. They also may work slightly differently depending on the lender.
This is an asset that secures your home loan.
If you default on your loan, the lender has a legal right to sell this asset. In other words, the security gives lenders peace of mind that they will be able to recover their money if you can’t pay back your loan.
Serviceability generally refers to a borrower’s ability to repay a loan based on their income, expenses, marital status, dependants, current and proposed loans (and/or credit cards). Generally, lenders will undertake a Serviceability Assessment when an applicant apply for a new loan.
STSL = Study or Training Support Loans
STSL (Study or Training Support Loans) that need to be repaid when the employee’s earnings or repayment income exceeds the minimum repayment threshold.
STSL (similar to HECS and HELP) loans are considered a liability for a loan application. Repayment calculations can be checked here – https://www.studyassist.gov.au/paying-back-your-loan/loan-repayment
This is the process of finalising the purchase of a property and then transferring ownership from the seller to buyer.
During settlement, the remaining money owed under the contract of sale is paid to the seller. The seller then provides the certificate of title which is updated to include the new owner and mortgagor (if any).
Settlement can be complex. This is why most people have a conveyancer or solicitor helping them out.
To learn more, read our article on property settlement.
This is a loan that’s split into two loan accounts. Part of the loan amount will sit in one account, while the rest will sit in the other account.
The interest rate charged may be different for each account:
- One of the accounts may have a fixed interest rate, which stays the same for the fixed-rate term.
- The other account may have a variable rate, which may go up and down over time. The rate may change in response to decisions made by the Reserve Bank of Australia, as well as other factors.
Fixed and variable interest rates each have advantages and disadvantages. A split loan may be a way to get the best of both worlds – but it really comes down to personal choice.
Make sure you’re aware of the pros and cons.
This is a tax you pay to a state or territory government when you buy a property.
Stamp duty rates are usually tiered based on your property’s purchase price. The higher the price, the more likely you are to pay a higher rate of stamp duty.
The exact amount you’ll pay depends on the state or territory you live in, and the value of your contract of sale.
stamp duty concession
This is a discount or exemption on the amount of stamp duty you may have to pay to the government when you buy a property. Stamp duty concessions may be available to eligible first home buyers in some states or territories.
standard variable loan
How do you know a seller has a legal right to sell a property? By doing a title search – that’s how.
When you do a title search, you’re not only looking for proof of ownership. You’re also looking for legal restrictions that may prevent the sale or affect how you use the property.
Title searches are usually done through the government body that registers property ownership in your state or territory. Property buyers usually get a conveyancer of lawyer to do the search.
This is another name for stamp duty.
This is an assessment of your property’s value.
Be careful not to confuse ‘valuations’ with ‘appraisals’. Valuations are usually done by a licensed property valuer. Appraisals are often done by real estate agents.
This is a type of interest rate.
Variable rates may go up or down over time, which is determined by the lender you have chosen. This means your repayments can change over the life of your loan.
This one’s easy. A ‘vendor’ is the person who is selling a property. It’s the same thing as a ‘seller’.
There’s only so much you can know about property by just looking at it. That’s why vendor statements are important.
As the name suggests, this is a statement made by the vendor and it includes information a buyer may want to know before they sign a contract of sale.
The statement usually includes details on any legal restrictions on the use of the property – but it may be slightly different depending on the state or territory you live in.
Vendor statements may be called something else depending on the state or territory you live in. For example, in Victoria they’re called a ‘Section 32’, while in South Australia they’re called a ‘Form 1 Disclosure Statement’.
Vendor statements are often a legal requirement, depending on the circumstances. If you’re buying or selling a house, it may be a good idea to have a conveyancer or lawyer looking after you. They’ll be able to provide advice on the vendor statement and the buying process in general.
Finance Circle Group do much more than arrange finance for home loans. We can help to identify and secure commercial and asset funding to enable your growth, while at the same time preserving your operating cash flow.
We can be a one-stop-shop for your financing needs. Contact us to find out more about how we can help you with commercial and asset finance.
FEEL FREE TO CONTACT US FOR AN OBLIGATION FREE DISCUSSION.
Finance Circle Group
The information on this website is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.