Lender Terminology: All the Home Loan Jargon Finally Explained!

Lender Terminology: All the Home Loan Jargon Finally Explained!

“Are you thinking about refinancing yet? How much equity have you got? Have you considered a bridging loan? What about portability? And will that be principal and interest…or interest-only?” When it comes to discussing finance, do you ever feel like you’re being spoken to in a different language? If so, you’re not alone. According to a recent survey, 84% of Australian home buyers confirmed they don’t know enough about home loans. And even current homeowners may have questions about the Home Loan Jargon and different lender terminology that gets used.

That’s why we’ve put together the following list of common finance industry terms – so you can have all the home loan jargon finally explained in a way that is simple and easy to understand.

All the home loan jargon explained

1. Bridging Loans:

This is a short-term loan that lets you buy your second home before you’ve sold your current home. Instead of having to sell first (and then frantically try and find the right home to buy before settlement day), a bridging loan covers the cost of your new home while you wait for your first home to sell. It’s usually an interest-only loan, which makes it easier to manage. Once your first home sells, the funds are used to pay out the bridging loan. 

2. Equity

Think of equity as the percentage of your property that you actually owe (not what the bank owns). To figure out how much equity you have, just subtract your current mortgage balance from the total value of the property. So, if your property is worth $500,000 and your home loan balance is $200,000, you have $300,000 worth of equity. 

3. Fixed-Rate

A fixed-rate is an interest rate that won’t change for a set period of time (usually between 1 and 5 years). With a fixed-rate loan, you won’t have to worry about fluctuating interest rates affecting your minimum monthly repayments. However, fixed-rate loans may reduce how many loan features you’ll have access to. 

4. Interest Only

When a home loan is ‘interest only’ it means you’re only paying off the accrued interest, not the balance of the mortgage. This means it will take you longer to pay off the home loan (and you’ll end up paying more interest overall). But initially (during the term of the interest-free period), your monthly repayments will be much lower. This can be useful for borrowers planning to renovate before they move in or for property investors.

5. Offset Account

An offset account is just like an everyday bank account, but it’s linked to your home loan. You can have your salary deposited straight into the offset account, and you can use this account to pay bills, buy food, etc. The great thing about an offset account is that it can reduce how much interest you have to pay. Any money you have in the account will be used to offset the balance of your mortgage when the lender calculates how much interest you owe. So, if your home loan balance is $300,000, but you have $35,000 worth of savings in your offset account, you’ll only be charged interest on $265,000. 

6. Portability

A home loan portability is another feature that some lenders will include (usually for an added fee). Basically, portability means you can take your home loan with you when you move to a new property. Instead of having to refinance your mortgage (and possibly take out a bridging loan), your home loan just moves with you.  

7. Principal and Interest

If your home loan is described as ‘principal and interest’, this means your minimum monthly repayments are paying off the accrued interest while also reducing the overall balance of your loan. Principal and interest loans will ensure that the balance of your home loan is paid off by the end of the loan term. 

8. Redraw facility

If your home loan has a redraw facility, it means that you can make added repayments and then redraw these funds at a later date. For instance, if you paid an additional $500 per month onto your mortgage, after 5 years you would have paid an added $30,000 on your home loan. You then have the option of redrawing these funds to use however you want. In the meantime, the added funds are reducing the amount of interest you’ll have to pay. 

9. Refinancing

Refinancing describes the process of transferring from your existing home loan to a new mortgage. This usually involves switching to a new lender, but it could just be changing to a new loan while sticking with your current lender. Refinancing can help you reduce your interest rate, get access to better loan features and access the equity in your property.

10. Split Loan

This describes a mortgage that is split into two different parts: one with a fixed interest rate and one with a variable interest rate. For example, you could choose to have 40% of the loan on a variable interest rate and the remaining 60% on a fixed interest rate. This kind of setup enables borrowers to lock in a fixed low rate while also taking advantage of the loan features available with a variable interest rate. 

11. Variable Rate

A variable rate is an interest rate that will move up and down at the discretion of the lender. Rate increases or decreases are most often caused by changes to the official Reserve Bank of Australia cash rate (which is reassessed every month). With a variable interest rate, your minimum monthly repayments could go up or down at any time. However, a loan with a variable rate will often have more flexibility and may give you access to better features. 

At PLS, our brokers speak your language. We’ll explain all your available finance options and answer any questions you may have in terms that are simple and easy to understand. So, there’s no need to worry about getting lost in finance industry jargon or complicated lender terminology! 

To find out more about Home Loan Jargon, just contact me on Ph: 0421 934 033 or Ph: 07 5597 6049.