10 common home loan terms explained
Taking out a home loan is equal parts daunting and exhilarating. You’re excited about buying your new home, but there’s the scary realisation that this is probably one of the largest investments you’ll ever make. Then throw in some confusing finance jargon and your confidence flies out the window.
Research into financial literacy reveals more than half of Australians struggle with financial concepts. With that in mind, we’ve asked our lending specialists at AFM to put together a list explaining some common home loan terms to help boost your confidence.
This is the percentage of your property that you own. It is determined by calculating the current market value of your home, less the balance still to be paid on your home loan. Let’s say, for example, your home’s current market value is $550,000 and the balance on your home loan is $300,000, then your equity would be $250,000. As a homeowner, you may be able to access some of the equity in your home loan by refinancing to another loan product.
Home loan fees and charges vary considerably from product to product and across lenders. This makes it difficult to compare different home loans with one another. The comparison rate can help you identify the actual cost of a loan because it is a standardised figure derived from the loan amount, length, repayment frequency, interest rate, fees and charges.
A redraw facility is a feature attached to some home loans which allows you to withdraw money if you have made additional repayments on your loan. Additional repayments can help you save on interest because they reduce the principal loan amount. The advantage of a redraw facility is that you can access those extra repayments as and when you need them. Some home loans charge a redraw fee for this service so be sure to check your home loan terms carefully.
A principal and interest (P&I) repayment on your home loan reduces both the principal amount borrowed and the interest on the loan. This is the exact opposite of an interest-only (IO) loan, where you are only repaying the interest accrued on the loan. At the end of a P&I home loan term the entire debt will be paid, however, at the end of an IO loan term, only the interests will be paid and the full loan amount will still be owed.
Loan portability is a home loan feature that enables you to keep your existing home loan if you sell your home and buy a new one. The loan is transferred to your new property which becomes security for the loan.
This is a savings or transaction account linked to your home loan where the balance is used to offset the principal loan amount daily, reducing the interest you pay. For instance, if your home loan is $450,000 and you have $20,000 in a 100% offset account, you will only be charged interest on $430,000.
Progressive drawdowns are a feature of construction loans. They allow you to withdraw funds from your loan bit by bit, to cover building costs at as they progress. Drawdowns are typically made at the deposit, base, frame, lock up, fit-out and final completion stages. The benefit of progressive drawdowns is that you only pay interest on the portion of the loan that has been paid out.
A split loan combines the stability of a fixed rate home loan with the flexibility of a variable rate home loan, by splitting your mortgage into 2 or more portions. The fixed portion allows you to manage the risk of interest rate rises, while the variable portion allows you to take advantage of interest rate cuts and to make extra repayments to pay down the principal on your loan.
RBA cash rate
The cash rate is the overnight interest rate that the Reserve Bank of Australia (RBA) offers institutions on inter-bank transactions. This, in turn, influences the interest rate that lenders give each other. The cash rate serves as a benchmark rate in the country and is one of many deciding factors when lenders determine what interest rate to charge borrowers.
A variation is a change to the agreed terms of your home loan. You can apply to your lender for a variation to increase your loan amount, change the security (property), apply to split your loan or change from an owner-occupied to an investment loan.
If there are any more terms you’d like defined or if you’d like to discuss your home loan options, call your friendly AFM lending specialist today. We’re available to chat Monday to Friday (8.30am to 5.00pm AEST) or you can leave a message and we’ll get back to you as soon as possible.