Loan terms explained
Home Loans come with their fair share of technical terms.
What do they mean? Below are an explanation of terms you need to know before making a decision.
A principal and Interest loan means that your fortnightly/monthly mortgage repayments will be a combination of paying down your principal, which is the amount you borrowed and interest payments on your loan.
A variable rate home loan mirrors market interest rates. As interest rates rise and fall, so do your repayments.
A comparison rate factors in all costs of a home loan. it represents the true cost of a home loan making is easier to compare loans and see which is cheapest. It is made up of the interest rate, the amount you’re borrowing, how often you’re making repayments and the time it will take to pay the loan back.
A redraw facility gives you the option to make extra payments into your home loan to reduce your principal loan amount and the amount of interest you pay on your loan. The money is not locked away in a redraw, meaning if you want the money back, it is as simple as doing an internal transfer back to a transactional account.
Loan to Value Ratio is something that financial institutions use to assess how risky a loan is and how much they’re willing to lend you. What LVR does is compare the amount you’re looking to borrow with the price or value of the property you want to buy. LVR is also used to determine what level of equity you’ll have in your property. Equity is how much of the property you actually own.
Lenders Mortgage Insurance is insurance financial institutions take out to protect against the risk of not recovering the full loan balance if you default on your loan. LMI will typically only be used if the LVR calculation is above 80%. The cost is passed on to you in a one-off premium, calculated as a percentage of your loan amount.
Settlement is the legal process where you become the new property owner – the process is managed by a settlement agent. On settlement day, your agent meets with the seller’s agents to finalise the paperwork and pay the outstanding balance on the property.