Deciphering the home loan jargon

Home loan lingo is like the most boring game of Scrabble ever. There are so many terms to understand, and sometimes it can feel like bankers are making it hard on purpose.

With ME, you’ll get a triple word score every time, so you can win a place on the property board.

Interest rate

This is like a two-letter word to get us on the board. The interest rate of your loan is the fee you’re charged for borrowing money, as a percentage of the loan amount. Even a difference of 0.1 per cent can save you plenty over the life of your loan, so it’s worth shopping around for the best deal.

Variable-rate and fixed-rate home loans.

You have a few options when you apply for a home loan.

A variable rate changes with the market. If your loan’s interest rate changes, your repayments will change, too. It’s great for you when rates are low, but remember to plan for potential rises.

A fixed rate doesn’t change for the duration of the loan. Great for stability, but you may be watching the market wondering…

Split loan

Think of it as the best of both worlds. That’s when part of the loan has a variable interest rate, and the rest has a fixed-rate loan.

Honeymoon rate

A honeymoon home loan rate is one that doesn’t last forever – an introductory rate designed to entice you. Usually it’s lower than market rates, so the appeal is obvious. But those low payments typically only last for six to 12 months before the whole loan reverts to a normal (or higher) rate.

Don’t be tricked into a loveless loan – find a forever loan love.

Comparison rate

A comparison rate explains the cost of a loan including all the extra and seemingly hidden fees and charges. When you use comparison sites to find a loan, for example, this figure will help you compare like-for-like, without getting tripped up by shiny deals.

Interest-only loan

When you make your home loan repayments, money comes off the loan. In a standard principal + interest loan, your payment covers the interest and pays down the actual figure you owe (the ‘principal’).

With an interest-only loan, you only pay the interest. Your repayments will be lower, but at the end of the interest-free period, you’ll still owe the full amount of principal.

Offset account

This is a separate account where you put your savings in and have it reduce the interest charged on your loan. So if you have a $500,000 loan and $25,000 in your offset account, your interest paid will be based on $475,000.

So why not just put that savings towards your repayments? Because holidays. Because emergencies. Because Black Friday sales. Because life!

Redraw

If home loan lingo is scrabble, the redraw is trying to use the Q without a U.

If you pay extra on your loan (above the normal home loan repayment), you can take extra money out again later. Sounds easy so far, but remember that using the extra money from your redraw facility now will add that money back later on to your loan balance. Unfortunately, it’s not free money.

Loan-to-valuation ratio (LVR)

Loan-to-value ratio is, as the name suggests, the amount of your loan as a percentage of the value of the property. For example, borrowing $340,000 to buy a $400,000 property gives you an LVR of 85 per cent. Having a lower loan-to-value ratio is better as it is a smaller risk to the bank or lender if you default on your loan. This means you’ll also avoid the costs that come with a lower deposit and you might even get access to a better rate.

Lenders Mortgage Insurance (LMI)

When you borrow most of the purchase price of your property, it can make lenders a bit nervous. If you’re borrowing more than 80 per cent, you’ll probably also have to pay for Lenders Mortgage Insurance. That’s a policy that protects the lender if you default on your loan .

It's an extra cost, but it c an be your ticket in – so just be aware of what’s best for you .

Stamp duty

When you were young this was licking stamps for your grandma. Now you’re old, it’s the amount of tax payable when you buy a property. It differs from state to state, and in some cases depends on the nature of the property itself, but you’ll need to keep it in mind when thinking about how much buying a house will cost.

Principal/capital

The principal is how much you owe on the property minus interest. This is the ‘actual’ amount you’ve borrowed, and the balance on which interest is calculated. The faster you can pay this down, the less interest you’ll pay.

Deposit

Lenders want to see evidence that you can save – and getting a deposit together is a great way to do this. Your initial payment comes off the total value of the loan, so it’s in your best interests to save as much as possible. It’s standard to require a 10% deposit, but having more than 20% can save you a bunch in Lenders Mortgage Insurance.

Refinancing

This is the equivalent of swapping your current scrabble letters for new ones – because the loan you started out with isn’t always the right one long-term. Refinancing is when you take out a new loan to replace the one you already have. Some people refinance to secure a better interest rate, while others are attracted to new and better features.

Guarantor

A guarantor is usually a family member, but can be anyone who will provide financial security for your home loan.

So for some lucky first home owners who can’t come up with the deposit, parents can step in to act as guarantors with the value of their own property . It’s a great back up, but money and family/friends can get tricky, so make sure the arrangement works for everyone.

Equity

Equity is the kind of word you hear at a dinner party and hope no one asks your opinion.

Equity is the difference between how much you owe and how much the property is worth. You may be able to access your equity to reinvest or make other large purchases at the lowest possible interest rate. Come at me dinner parties!

A final word

Home loans are complex beasts – and sometimes it feels like you have to be a banker just to understand what it all means. Instead talk to a ME Mobile Banker (in normal language) and get ready to start picking your tiles .