Whether you’re new to the home loan scene or a seasoned mortgagor, home loan jargon can be a little bit confronting. But understanding the basic jargon isn’t that difficult, and can help you to feel (and be) confident that you know what’s being said and, most importantly, what it means for you!
We’ve created a home loan jargon guide to walk you through the most used home loan terms and their meanings. To keep it simple, we’ve broken them down (alphabetically) into time periods:
1. Pre-Loan Approval
2. Loan Approval
3. Post Loan Approval
Home Loan Jargon Guide
Before you’re approved for your loan it’s important to understand what all this jargon means. You might be new to the lending game, and you’ll need to understand exactly what your potential lending institution means when it uses certain terms.
This is the one-off fee charged by some lending institutions to cover the costs of setting up your home loan.
Your borrowing capacity is how much a lending institution is prepared to lend to you, based on a range of financial factors, such as your income, living expenses and credit record. These factors support your capacity to repay the home loan.
Conditional pre-approval is when a lending institution agrees to lend you a specified amount of money to purchase a property. There is not yet a formal, legally binding approval for a home loan, but it helps you to refine your property search to be within your price range.
This is another name for an application fee, which is defined above.
Fixed interest rate
A fixed interest rate home loan is where the interest rate will not change for the period specified in the home loan, usually between one and five years. The fixed rate will generally revert to a variable rate loan (defined below) at the end of the set period of time.
The interest is the rate that is charged to you daily by your lending institution. Your interest rate can be fixed or variable.
In terms of home loan jargon, a lending institution is a financial institution able to lend you money to purchase a property and receive repayments for the loan. These include banks, building societies and credit unions.
The principal is the amount you borrow under your home loan excluding any fees, charges or interest payments, for example $500, 000.
Your minimum repayment, mortgage repayment or home loan repayment usually mean the same thing. It’s the agreed amount, set by the lending institution, that you are required to pay each week, fortnight or month.
In a mortgage jargon context, security is the asset that secures your home loan. The security is therefore the property that you will purchase with your home loan funds. If you default on your mortgage repayments, the lending institution has a legal right to sell the asset that secures the loan (your home) and recover their money.
Settlement is when the lending institution formally advances money owed under the contract of sale to the seller. The seller then provides the certificate of title to the lending institution. This is updated to include you as the new homeowner (mortgagor) and lending institution (mortgagee).
The average settlement period is four to six weeks.
Variable interest rate
A variable interest rate is subject to change (variation) over time. Lending institutions may raise or lower their home loan interest rates in response to changes to the cash rate or due to the cost of doing business. With a variable interest rate, if rates go down, you will experience lower home loan repayments. If rates increase, it’s likely your repayments will also.
Your offer to purchase a property has been accepted, and settlement has occurred. Here are another few mortgage jargon terms you may come across.
Certificate of title
A certificate of title is the formal record of a property, like a birth or marriage certificate. It details the property’s identity, such as its ‘lot’ and ‘plan’ number. It also indicates whether the property is security for a home loan. Your lending institution holds the certificate of title to your home as security for the loan.
In home loan jargon, a default is when a repayment is missed for whatever reason. And you must not ignore a default. The mortgage may have penalty fees for defaults, and these can be recorded on your credit record.
Equity is the dollar amount of ownership you have in a property minus amounts owed to the lender. For example, if your home is worth $800,000 and the balance of your home loan is $500,000, your equity in your property is $300,000.
Lenders use the legal term mortgage to describe a home (or other property) loan. Under the terms of a mortgage, the property is used as security for the amount borrowed. This is what gives the mortgagee (the lending institution) the right to sell the property.
The mortgagee is the lending institution providing you with a home loan. They ‘hold the mortgage’ over your home and will have the right to recoup their investment should you default on your home loan repayments.
The mortgagor is someone who takes out a home loan (you).
Post Loan Approval
This is the golden moment all homeowners live to see. Discharging your mortgage means you have made your final home loan repayment and you own your home debt-free. A discharge can also occur if you sell your home or refinance your existing loan.
A redraw facility is a mortgage feature of some loans. Under it, if you have made additional home loan repayments, you can access those funds down the track. Redraw facilities are more common in variable interest rate loans, rather than in fixed rate loans.
A refinance occurs when your change from one lending institution to another, or from one product to another, after your mortgage is in place. The terms of a new loan might be more financially attractive than your existing mortgage. Or it may have a better interest rate or more flexible features.
Speak to an Expert
We created our home loan jargon guide to give you a head start in understanding your home loan. Whether you’re a first home buyer, refinancing or investing, our expert team can talk you through all these mortgage jargon terms and much more.
Give us a call today at Lending Loop, and let’s see how we can help!