Key Takeaways:
Understand the home loan language that matters most for first-home buyers
Break down common terms you’ll encounter with lenders
Know how each part of your home loan works so you feel more confident in your journey
That sets expectation and reinforces value.
Buying your first home comes with a whole new language.
If you’ve ever felt unsure about mortgage terms while researching or speaking to lenders, you’re not alone. This glossary breaks down common home loan terms in plain English, so you can understand what they mean and why they matter before making big decisions.
GLOSSARY
Deposit / Equity Contribution / Security Deposit
This is your cash contribution toward the costs of purchasing a home. And this is where the confusion starts!
Note that I said "costs of purchasing" not "purchase price". You see "costs of purchasing" including the purchase price, stamp duty, conveyancing (aka settlement agent, solicitor), lender & other fees and rates adjustments (reimbursing the seller for advanced payment of water, council and strata rates).
So if you have a deposit of 20% (of the purchase price), as most people commonly phrase it, you mind find that 5% goes to those other items, leaving with a deposit of only 15% of the purchase price.
It is very important to be clear about what your cash position represents because the term deposit is used loosely and inexactly depending on who you are talking to.
To avoid Lender's Mortgage Insurance, in most cases, you need a deposit of 20% of the purchase prices, and since the bank will not fund those additional costs, you actually need something like 25%.
So to be clear, when a bank or broker says you need a deposit of 20% to avoid LMI, they are referring to a n Equity Contribution of 20%. That is the percentage of the purchase price your cash will cover. Your overall deposit needs to be higher to cover those additional costs.
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It's gets more confusing!
A Real Estate Agent will require a deposit in order to secure a contract of sale. This can be as little as $1,000 and sometimes up to 10% or more of the purchase price. There is no fixed formula and it a negotiable outcome.
This is more correctly called a Security Deposit. It is consideration paid to secure the contract as an exclusive deal between the buyer (you) and the seller. It also represents 'hurt money' should you not uphold your end of the bargain, such as using all reasonable endeavours to obtain finance.
For this reason, the Security Deposit can be a bargaining tactic to demonstrate the strength of your offer and differentiate you from other bidders.
If the contract runs smoothly and becomes unconditional, the Security Deposit is either returned to you at settlement of the purchase, or subsumed into your additional funds (Deposit) which together go towards covering the Costs of Purchase.
Pre-Approval / Conditional Approval / Approval-In-Principle
These 3 terms are almost interchangeable. They generally mean that you're pretty close to a full (unconditional) approval but for some amount of additional work.
Most people understand that a pre-approval allows you house hunt with confidence and potentially place unconditional offers on houses, meaning that you do not require the contract to include the "condition on finance approval clause".
Pre-approval says: the application you have submitted is fine, you just need to find an address to put into the application.
But, there are pitfalls. For starters, many banks have moved to not fully assessing a pre-approval, meaning they only do a face value check of the n umbers in the application. The nuances, and potential surprises, come when they conduct a full assessment and in doing so may make adjustments to certain figures to numbers that they a willing to accept in the application, such as the full inclusion of overtime income, bonus income and allowances, which can materially affect the application.
In a hot market your pre-approval can be a negotiating tool. It can even allow you to place unconditional offers with less risk of problems with the finance actually coming through. So you want to firstly be sure that what you have received from the bank is a fully assessed pre-approval. This is increasingly no longer the case.
Conditional approval is a similar concept and usually means: "We approve your loan if you can meet certain conditions." Those conditions can be anything from providing an additional document, completing a form, or some other aspect that shores up your application (e.g. confirmation that you are no longer on probation with your job).
Approval-In-Principal is generally interchangeable with Conditional Approval, it just depends on which bank is issuing it.
The bottom line: If you want a pre-approval to give you confidence in the house hunt and negotiation, then you want a fully assessed pre-approval (with a formal letter to verify it!).
Stamp Duty
Stamp duty is a state government tax paid when you buy a property.
The amount depends on the property price and your location, and for first-home buyers, concessions or exemptions may apply. It’s an important cost to factor in early so there are no surprises when budgeting.
As mentioned, your deposit, which generally refers to the percentage of the property value you must contribute, DOES NOT include stamp duty - that is on top!
First Home Owner Grant (FHOG)
The First Home Owner Grant is a state government scheme designed to help eligible first-home buyers purchase or build a new home.
Eligibility and grant amounts vary by state and depend on factors like property value and whether the home is new. It can provide a helpful boost, but it’s not available in every scenario.
Understanding eligibility early can help with planning. Likewise, the process of buying a newly built home (such as an off-the-plan purchase) or building your own home (buying land and engaging a builder) can be involved, complex and daunting. Compared to buying an existing property (pre-loved 😊) these are added challenges that many first home buyers choose to avoid, since the act of making perhaps the largest purchase of your life is already enough to get the heart racing!
Loan Term
The loan term is the maximum length of time you agree to repay your home loan.
Most home loans have a term of up to 30 years, but the term you choose affects your repayments and the total interest you pay over time. A longer term usually means lower monthly repayments, while a shorter term can reduce interest but increase cash flow pressure.
Many think that if they want to save on the cost of interest over the life of the loan they need to select a shorter loan term. Others find the idea of a 30 year loan simply dreadful, and won't do it!
But here's the secret: for a standard, variable rate home loan, the loan term and minimum repayment represent your absolute fallback position. What you must pay. But your absolutely at liberty to pay more than the minimum. In fact, we would wholly encourage it! The more you pay above the minimum, the faster that loan gets paid off and the lower your life of loan interest cost.
What's more - your debt capacity is higher when you select a longer debt term, therefore, even if you aren't borrowing your maximum, your application looks stronger! Choosing a longer debt term doesn't lock you into a lifetime of mortgage drudgery. It gives you the buffer and flexibility to fallback to that minimum repayment if tough times occur, and the freedom to charge ahead and pay off as fast as your humanly can when times are good. Ultimately, the loan contract doesn't define how long you will have debt - you will!
Interest-Only vs Principal and Interest
With a principal and interest loan, you repay both the amount you borrowed and the interest charged on it.
With an interest-only loan, you only pay the interest for a set period, meaning the loan balance doesn’t reduce during that time. While this can lower your monthly outgoings initially, it will result in a higher life of loan interest cost over the long term.
Interest Only is almost never recommended for an Owner Occupied home loan, though there are advantages to using this structure for investment property loans.
Variable Rate
A variable rate is an interest rate that can move up or down over time.
This means your repayments may change, but variable loans often offer more flexibility, such as the ability to make extra repayments or access features like offset accounts.
The ways in which the interest rate on a variable rate loan might vary usually comes down to a decision by the Reserve Bank of Australia (RBA). Think of this bank, a semi-government institution, as setting the cost of money for all banks. Those banks are simply acting like retailers - buying from wholesale sources and selling to you at retail prices. So the cost to provide your loan are affected by the decisions of the RBA, and the RBA decisions generally affect all banks in Australia in mostly the same way.
Of course there are very rare, but sometimes very impactful, other reasons why the variable rate may change. A financial crisis can greatly drive up or down the cost to the bank for providing your loan, and they will use variable rates to pass this onto you!
Comparison Rate
The comparison rate is designed to show the true cost of a loan by combining the interest rate with most fees.
It’s useful for comparing loans side by side, but it doesn’t always include every cost or feature. That means the lowest comparison rate isn’t automatically the best loan for your situation.
Likewise, it needs to make certain assumptions, such as that a person will repay a loan in 20 years, which is clearly not always the case. The average is much shorter either because people continue to receive pay increases, or because they decide to sell and repay the loan before moving into their next purchase.
Generally, the interest rate is more influential in life of loan costs, especially when looking at smashing through that loan quickly!
So, comparison rate is a starting point, not the full picture.
Offset Account
An offset account is a transaction account linked to your home loan.
The balance in the account reduces the amount of interest you’re charged on your loan, which can help lower interest costs over time while still keeping your money accessible.
Not all loans offer this feature, and some may have limits or conditions.
Redraw Facility
A redraw facility allows you to access extra repayments you’ve already made on your home loan.
If you’ve paid more than required, you may be able to withdraw those additional funds later if needed. Not all loans offer this feature, and some may have limits or conditions.
Redraw and Offset sound similar but work but different mechanisms and also present differently in your online banking. Generally, it is psychologically and functionally easier to spend money out of your offset account and thereby dilute the benefits which comes from having that cash sitting there, reducing interest cost. With discipline, Offset and Redraw can be used to great effect.
Extra Repayments
Extra repayments are payments you make on top of your minimum loan repayments.
These can help reduce your loan balance faster and save on interest over time. Some loans allow unlimited extra repayments, while others may have restrictions.
Even small extra payments can make a difference in the long run. The general rule of thumb is: for maximum life of loan interest savings, pay as much extra money as you can, whenever you can, and without delay!
Lenders Mortgage Insurance (LMI)
Lenders Mortgage Insurance is a one-off cost that may apply if your deposit is below a certain percentage of the property value.
It protects the lender, not the borrower. For many first-home buyers, paying LMI can make it possible to buy sooner rather than waiting longer to save a larger deposit.
This can be a large fee. It is not refundable. Moreover, it is often added to the loan balance, so you effectively pay interest on it. This is often not obvious when considering an LMI loan - that is, true costs are hidden. You are always best to consider this cost in full versus what might occur if you simply save up for longer, in which case you'd compare the cost associated with how much more you think property prices might rise over the additional saving period.
Credit Score
Your credit score is a number that reflects how you’ve managed credit in the past.
It’s based on things like repayment history, existing debts, and how often you apply for credit. Lenders use it as one factor to assess risk, but it’s not the only thing that matters.
A lower score doesn’t automatically mean no. It just means the approach needs to be more considered.
This blog post provides more information about credit scores, how they are assessed and how you can keep yours strong!
Serviceability / Debt Capacity / Borrowing Capacity
Serviceability refers to a lender’s assessment of whether you can afford a loan.
They look at your income, expenses, debts, and lifestyle to determine how much you can comfortably repay. This assessment is designed to ensure the loan remains manageable, even if interest rates rise.
There are various buffers that lenders use in this assessment with regards to what types of income they'll allow to be included, and at what percentage, your expenses, tax etc. For this reason, your assessment of what you can afford will almost certainly look different (and rosier!) than the bank's assessment.
A servicing assessment produces a number representing the difference between your income and your expenses, including all existing and proposed loans. If that is a positive number, your loan services and can be approved.
Debt capacity, or borrowing capacity, is the maximum debt figure which produces a zero, or very slightly positive servicing assessment.
Guarantor
A guarantor is usually a close family member who agrees to support your loan using their own property as security. This can help some first-home buyers enter the market sooner or avoid certain costs. However, it also carries risk for the guarantor, so it’s a decision that needs careful thought and clear advice.
It’s not right for everyone, but it can be an option in specific situations.
This is a big area and there are a bunch of nuances to consider - too much to get into here. reach out if you'd like more information.
Refinancing
Refinancing is the process of moving your home loan from one lender to another, or changing your existing loan structure.
People usually refinance to get a better rate, reduce repayments, access equity, or adjust features like offset accounts or flexibility. While it’s more common later on, it’s still helpful for first-home buyers to understand early so you know your loan isn’t locked in forever.
A home loan should evolve as your situation changes.
Settlement
Settlement is the final step in the property purchase process.
This is when the remaining funds are paid, ownership of the property is transferred to you, and the keys are handed over. While it’s a big moment for buyers, most of the work happens behind the scenes between lenders, conveyancers, and solicitors.
From your perspective, it’s the day everything becomes official.
Conveyancer or Solicitor
A conveyancer or solicitor handles the legal side of buying a property.
They review contracts, manage paperwork, and ensure the property transfer is completed correctly. While much of their work happens behind the scenes, their role is essential in protecting your interests throughout the process.
They work closely with lenders and brokers to help settlement run smoothly.
If there is a term you want to see explained in this glossary please click here to get in touch and ask us a question!