Finance Jargon – A First Home Buyers Guide!

Buying your first home is an exciting time for many first home buyers, however it can also be a little confusing. First home buyers are typically inundated with an abundance of new information which is important to understand when deciding on which is the best finance option for your new home.

When it comes to finance the jargon that is used can be a little perplexing for first home buyers, so to help you avoid any confusion on your end we have put together a basic jargon guide that with make your first home purchase a little easier!

Arrears: An outstanding or overdue amount. If a client is behind in their loan repayments, they are in arrears.

Basis Points: One basis point equals 0.01% interest. So 25 basis points equals 0.25%.

Break Costs:  Penalty charges for ‘breaking’ or ending a fixed term loan before the agreed date. Calculation is based on the remaining term and the difference between the clients rate and the banks current rate.

Comparison Rate: A comparison rate is a tool to help consumers identify the true cost of a loan. It factors in the interest rate, fees and charges and displays a single percentage rate that can be used to compare various loans from different lenders.

Conditional Approval: After the lender is happy with a file but there are still a few documents they require or information to confirm, they will issue a Conditional Approval. After all of these conditions have been met, the clients will receive a Formal Approval. It’s also an approval in principle which is a useful pre-purchase exercise that gives you an indication of how much you can borrow.

Cooling Off Period: This helps protect buyers who sign a Contract of Sale, but may change their minds later. The cooling off period gives the buyer a chance not to go forward with the purchase within an agreed timeframe.

Equity: It’s the current value of a property less the amount still owed on its mortgage. Equity usually increases as the principal of the mortgage is paid off. Market values and improvements to the property can also affect equity.

First Home Owners Grant:  A grant from the Federal and State Governments. It was introduced as compensation for the increased cost of housing after implementation of the Goods and Services Tax (GST) on 1 July 2000. It’s only for buyers that have not previously bought property in Australia.

Fixed Rate: An interest rate that applies to a loan for a set term. Both the interest rate and loan repayments are fixed for the agreed term, regardless of any interest rate variations in the home loan market. The agreed term is usually anywhere between 1 and 5 years.

Formal Approval: Once the lender has received all supporting documents and they are happy to proceed to loan documentation, the client will be Formally Approved.

Gazumping: When a seller accepts an offer from a buyer but then proceeds to formalise the sale of the property to another buyer with more favourable terms.

Guarantor: A person or entity that agrees to be responsible for another's debt or performance under a contract, if the other fails to pay or perform. It is also common for someone to use equity in their property as security to assist a family member purchase a property with a smaller deposit.

Interest in Advance: This is where you pay next year’s interest now and claim it back as a deduction this year. Needs to be completed prior to June 30th each year.

Interest Only: A loan where only the interest is paid for an agreed term, usually 1 to 5 years. The principal is then repaid over the remaining term of the loan by the conversion of repayments to principal and interest.

Introductory Rate: A loan offered to new borrowers at a reduced rate for an introductory period. It’s also called a discounted or honeymoon rate.

Lender's Mortgage Insurance (LMI): Insurance which covers the lender if a borrower defaults on a loan and the sale of the property doesn’t cover the outstanding debt. It’s usually required for the loans the lender consider a larger risk. E.g. Where the amount borrowed is over 80% of the property value. Only the lender is covered by this insurance. It offers no protection to the borrower.

LVR: The term LVR is an acronym for Loan to Value Ratio. It is the percentage of the loan amount compared to the value of that property. E.g. If a house is worth $1,000,000 and the loan $800,000, the LVR will be 80%. Most lenders require a borrower to take out Lender's Mortgage Insurance if the LVR is 80% or more.

Offset Account: A savings account linked to a home loan. The interest earned by the money in the savings account offsets - or reduces - the interest due on the home loan. A 100% offset is where the interest rates earned and paid are the same. A partial offset account is where the interest earned on the offset account is only a portion of the rate paid on the home loan.

Pre-Approval/AIP (Approval in Principal): We provide the lender all the required supporting documentation to purchase a property, but the clients haven’t located a property yet. They get issued an approval to purchase a property up to a certain amount where the lender has already approved their application.

Rate Lock: A fee charge that guarantees the customer their fixed or guaranteed interest rates for a nominated period. E.g. If settlement is due in 6 weeks and the clients want to fix at a certain rate, they can pay a rate lock fee to guarantee they will receive that fixed rate at settlement even if the rates move.

Redraw Facility: A component of a variable rate loan which enables a borrower to make extra repayments on the loan but later redraw this money if needed.

Settlement: This is where lenders and solicitors meet to exchange property and lending documentation such as bank cheques and titles. They meet at an agreed location at the same time to finalise the property ownership and loan.

Split Loan: Generally a loan that is part variable and part fixed, but it can also be a loan with multiple variable parts. Borrowers wanting to use equity in a property to invest in the share market may make “multiple variable splits” to better track the return on their investment.

Stamp Duty: A State Government tax based on the purchase price of the property. It’s also payable on mortgages in some states. Each state and territory has different rules and calculations.

Standard Variable: A rate that goes up or down depending on the market interest rates.

Title Fees: Charged by a state or territory’s Titles Office for title searches, property ownership transfers, the registration of new mortgages and the discharge of old ones.

Top Up: Clients have an existing loan and they are seeking to get additional funds under their existing loan account. Existing loan will increase and no new loan account number issued. E.g. Existing Loan: $500,000. Seeking Top Up of $200,000. Existing Loan will increase to $700,000.

Valuation: A report showing the professional opinion of a property’s value.

Surround yourself with a team of professionals who can provide you with ongoing support and expertise in securing your financial future.

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This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances. All loans are subject to lenders terms and conditions – fees, charges and eligibility criteria apply.