Decoding Bank Jargon: A Simple Guide for Home Buyers
Buying your first home means learning a whole new vocabulary, and it can feel overwhelming when lenders and brokers start throwing around terms you’ve never heard before. Here’s a simple guide to some of the most common bank jargon you’ll come across on your home buying journey.
-
Loan to Value Ratio (LVR)
What it means: The percentage of the property’s value that you’re borrowing.
Why it matters: A lower LVR generally means a lower risk to the lender, which can affect your interest rate and whether you’ll need Lenders Mortgage Insurance.
Example: If you’re borrowing $400,000 on a $500,000 property, your LVR is 80%.
-
Lenders Mortgage Insurance (LMI)
What it means: Insurance that protects the lender (not you) if you default on your loan, usually required when your LVR is above 80%.
Why it matters: LMI can add a significant cost to your loan, so understanding when it applies can help you plan your deposit.
Example: Borrowing more than 80% of the property value will usually trigger an LMI premium, which can be paid upfront or added to your loan.
-
Offset Account
What it means: A transaction account linked to your home loan, where the balance is offset against your loan balance when interest is calculated.
Why it matters: Money sitting in your offset account reduces the amount of interest you pay, without you needing to make extra repayments.
Example: If you have a $500,000 loan and $50,000 in your offset account, you’ll only be charged interest on $450,000.
-
Redraw Facility
What it means: A feature that allows you to access extra repayments you’ve made on your loan.
Why it matters: It gives you flexibility to make extra repayments to reduce interest, while still being able to access those funds if you need them later.
Example: If you’ve paid an extra $10,000 off your loan, a redraw facility may let you withdraw that money for another purpose.
-
Fixed Rate Loan
What it means: A loan where the interest rate is locked in for a set period, regardless of what happens to market rates.
Why it matters: It gives you certainty over your repayments for that period, which can help with budgeting.
Example: If you fix your rate for two years, your repayments won’t change even if the lender’s rates go up or down during that time.
-
Variable Rate Loan
What it means: A loan where the interest rate can move up or down in line with market conditions.
Why it matters: Your repayments can change over time, but variable loans often come with more flexible features than fixed loans.
Example: If the lender changes its variable rate, your repayments will adjust to reflect the new rate.
-
Comparison Rate
What it means: A rate that combines the interest rate with most fees and charges, to give a more accurate picture of the loan’s true cost.
Why it matters: It allows you to compare loans from different lenders on a more even footing, rather than just looking at the advertised interest rate.
Example: A loan with a low interest rate but high fees may have a higher comparison rate than a loan with a slightly higher rate but lower fees.
-
Principal and Interest
What it means: A repayment type where each payment reduces both the amount you borrowed (the principal) and the interest charged on it.
Why it matters: This is the most common way to repay a home loan, and it means you’re steadily building equity in your property.
Example: Over time, more of each principal and interest repayment goes towards the loan balance and less towards interest.
-
Interest-Only Loan
What it means: A loan where your repayments only cover the interest charged, without reducing the amount you borrowed.
Why it matters: Repayments are lower during the interest-only period, but you’re not building equity, and repayments will increase once the period ends.
Example: An interest-only period is often used by investors, or for a set period at the start of a loan.
-
Application Fees
What it means: A fee charged by the lender to process your loan application.
Why it matters: This is an upfront cost that adds to the overall expense of getting your loan, on top of your deposit and other costs.
Example: Application fees vary between lenders and some may waive them as part of a promotion.
-
Valuation Fees
What it means: A fee to cover the cost of a professional valuation of the property you’re buying.
Why it matters: Lenders need to confirm the property is worth what you’re paying for it before they’ll approve your loan.
Example: Some lenders include valuation fees in their standard charges, while others pass the cost directly on to you.
-
Stamp Duty
What it means: A state government tax charged on the purchase of property.
Why it matters: It can be one of the largest additional costs of buying a home, and the amount varies depending on the property value and your state.
Example: First home buyers may be eligible for stamp duty concessions or exemptions depending on their state and circumstances.
-
Conveyancing Fees
What it means: Fees charged by a solicitor or licensed conveyancer for handling the legal transfer of the property into your name.
Why it matters: Conveyancing is a necessary part of any property purchase, and it’s worth budgeting for as a separate cost.
Example: Conveyancing fees can vary depending on the complexity of the purchase and the professional you use.
-
Legal Fees
What it means: Broader legal costs associated with reviewing contracts and other documents related to your purchase.
Why it matters: These costs are separate from conveyancing and should be factored into your overall budget.
Example: Some solicitors bundle legal and conveyancing services together, while others charge separately.
-
Service Fees
What it means: Ongoing fees charged by the lender for administering your loan.
Why it matters: These fees add to the overall cost of your loan over its life, so it’s worth comparing them between lenders.
Example: Some loans charge a monthly service fee, while others may charge no ongoing fees at all.
-
Annual Fees
What it means: A yearly fee charged by some lenders, often associated with package loans that bundle in additional features or discounts.
Why it matters: An annual fee can offset the value of any discounts or features included in a package, so it’s worth weighing up the overall cost.
Example: A package loan with an annual fee might include discounts on the interest rate, an offset account, or fee waivers on other products.
Understanding these terms can make a huge difference in how confident you feel throughout the home loan process. If something doesn’t make sense, don’t be afraid to ask — that’s exactly what a broker is there for.
Feeling Confused by Bank Jargon?
If any of these terms have you scratching your head, or you’d like a plain-English explanation of your own loan documents, get in touch at jane@justrightlending.com.au.