Common home loan & mortgage terminology and definitions

Aussies are known for being property-savvy. We know our townhouses from our apartments, and our strata titles from our freeholds. But that same level of understanding doesn’t necessarily translate to the mortgage market.

While we’re generally across the difference between fixed and variable rate home loans, other mortgage terminology such as ‘loan-to-value ratios’ and ‘comparison rates’ can pass us by. But not for long. 

Glossary of Australian home loan & mortgage terminology

Your Mortgage has compiled some of the most common mortgage terms current and future home loan borrowers need to know, starting with five big ones that are commonly misunderstood.

1. What is refinancing?

Whether you already have a home loan or you’re in the market for your first mortgage, it's integral that you’re across the basics of what refinancing is and what it can do for your financial situation.

To refinance means to swap mortgage products. It’s that simple. Here are the most common reasons a borrower would want to refinance:

• To secure a lower interest rate

• To secure additional features like an offset account (more on those in a moment)

• To access their home equity

In the act of refinancing, your new lender will pay your old lender the amount of money you owe and issue you a new mortgage. 

Refinancing isn’t free, but many borrowers find that the cost of refinancing is quickly recovered due to the savings realised from doing so. 

2. What is a Loan-to-Value Ratio (LVR)?

While the term loan-to-value ratio (typically abbreviated to LVR) might be foreign to many property enthusiasts, its meaning won’t be. A person’s LVR is a measure of how their deposit stacks up against their property’s value. Here's a fictional example showing how LVR works:

Meet Barry.

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Barry has been saving his pennies and has built a $100,000 deposit for his first home. Luckily for him, his dream property is for sale right now for $500,000. 

Barry’s deposit is equivalent to 20% of his property’s value. That means he will likely walk away from his property purchase with an LVR of 80% – 80% of his property purchase will be funded with a loan.

A borrower’s LVR is one of the measurements a bank or lender will use to assess how much risk they represent. A borrower with a low LVR is generally deemed a low risk to a bank or lender, while another with a high LVR is often thought to be a higher risk. 

Typically, lenders allow a person to borrow as much as 80% of their property's value. Exceed that threshold, and a buyer might need to pay for Lenders Mortgage Insurance (LMI).

3. What is Lenders Mortgage Insurance (LMI)?

Another key piece of mortgage terminology homebuyers would be wise to be aware of is LMI.

There’s often confusion around what LMI actually is. Is it insurance to help a buyer if they fall into hardship? Is it an extra fee a borrower is forced to pay for no reason? 

The answer is ‘C’; none of the above.

LMI is an insurance policy taken out to protect a lender. While a buyer will pay for LMI, it exists only to protect a bank or lender against losses realised if that borrower were to default on their loan. Most lenders demand borrowers with an LVR of more than 80% pay for LMI, which can amount to thousands of dollars. 

If you’re purchasing your first home and don’t quite have a 20% deposit, you might be able to dodge the cost by utilising the Home Guarantee Scheme. 

4. What is a mortgage’s comparison rate? 

There are many important factors to consider when comparing one home loan to another. Some borrowers will focus on the interest rate on offer while others might revolve their search around the features they most desire. 

Perhaps a more holistic way to pit one home loan product against another is to consider their respective comparison rates. The comparison rate, also known as the Average Annual Percentage Rate (AAPR), melds a home loan’s interest rate with any fees or charges it demands, allowing those comparing products to consider their overall cost with one simple figure.

But the comparison rate isn’t a fool proof measurement of the value a home loan product provides. For instance, it won’t take into account the use of features that could reduce the interest a person pays, such as offset accounts.

5. What are offset accounts & redraw facilities?

Two more mortgage terms that might have little meaning to average borrowers are offset accounts and redraw facilities. 

Not only are these two home loan features often misunderstood, they are also commonly confused for one another. Here’s how they work:

Offset accounts

An offset account works in a similar way to a savings account, but the money that’s kept in an offset account saves a borrower interest rather than earning them interest. Funds stored in an offset account are ‘offset’ against those owed on a home loan.

Let’s bring Barry back in as another example:

What you need to know about redraw facilities 

A redraw facility, on the other hand, allows a borrower to access any extra repayments they’ve made over the life of their loan.

So, if Barry had paid $1,000 extra each month on top of his regular home loan repayments, he could feasibly redraw $12,000 at the end of each year to help pay for his annual holiday. 

Since a person will only pay interest on the outstanding balance of their home loan, making extra repayments can reduce the interest portion of their repayments. 

6. What is amortisation?

Amortisation is the process of paying off your home loan over time through regular repayments of both principal and interest. Each payment gradually reduces your home loan’s principal balance until it's completely paid off.

7. What are arrears?

Falling into arrears means you're behind on your home loan repayments. Missing repayments can impact your credit rating and lead your lender to charge additional fees.

8. What is a break fee?

A break fee is a penalty charged by your lender if you pay off your fixed rate home loan early or if you refinance to another mortgage before the end of a fixed rate period. It's designed to cover any losses realised by the lender in the event of an early termination.

9. What are bridging loans?

A bridging loan is a short-term loan that helps you purchase a new property while you're still selling your existing one. It can essentially ‘bridge the gap’ in a person’s finances while they’re between the two transactions.

10. What is conveyancing?

Conveyancing is the legal process of transferring ownership of property from one person to another. Typically performed by a conveyancer or solicitor, conveyancing involves preparing and reviewing documents and ensuring everything is in order in time for settlement day.

11. What is home loan pre-approval?

Being pre-approved for a home loan means your lender has agreed, in principle, to lend you a certain amount of money to buy a property. Getting pre-approval can give you a clearer idea of your budget and shows sellers you're a serious buyer.

12. What is settlement?

Settlement is the final stage in the property purchase process, where the ownership is legally transferred from the seller to the buyer. It's the day that you’ll get the keys to your new home and become responsible for meeting your home loan repayments.

13. What is a property valuation?

A valuation is an assessment of a property's value, whether that be its value on the market or how much it would cost to rebuild. Traditionally, valuations were carried out by a professional valuers. However, these days, many lenders use analytics to assess the value of particular properties.

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