Buying your first home? These are the vocabulary terms you need to know
Congrats! You’re ready to start looking for your dream home. But if you thought scrimping and saving that deposit was a hard slog, just wait until you’re swimming in confusing terms like LVR, equity and all sorts of finance jargon.
While attending a First Home Buyers Course and will give you all the information you need to get started, it’s also a good idea to get acquainted with these definitions.
To cut out some confusion, we’ve rounded up the most important home-buying terms and translated each into plain English.
Consider this your cheat sheet to common real estate and your 101 to buying your first home.
To agree to the terms and conditions of an offer or contract
Extra funds paid into the loan over and above the minimum prescribed payments
The area of land that is subdivided into smaller portions of land
The fee that is charged by a lender when you lodge a loan application
When the value of the property increases from its original value
Body corporate levy
The fee paid to a body corporate to cover various administrative cost relating to the common property. This refers to apartments and units, not houses
A shorter term loan that is taken out to purchase a new property before selling your existing property
Break cost / early repayment cost
A fee which may be payable if, during a fixed rate period, the borrower makes certain changes such as switching the loan from a fixed to variable rate or fully prepaying the loan prior to the expiry of the fixed rate period. Economic cost is the lender’s estimate of its loss resulting from the change
The amount by which proceeds from the sale of property exceeds the original purchase price
Certificate of title
This document details the land dimensions and ownership details, and whether there are any encumbrances / caveat
While contents insurance covers the things you own, buildings insurance is for the actual house
A comparison rate is a tool to help people identify the true cost of a loan. It is a rate which includes both the interest rate and the ascertainable fees and charges relating to a loan, reduced to a single percentage figure
Contract of sale
A written agreement outlining the terms and conditions for the purchase or sale of property
Cooling off period
A period of time after exchange of contracts during which time the contracts may be cancelled
Failure to meet debt payment on due date
A portion of the purchase price that is paid by the buyer at the time of exchanging contracts on the purchase of a property
The value of the property decreases
The amount of money available for a person to borrow, based on their current financial state
Debiting or disbursement of loan funds at settlement and usually paid to 3rd parties or deposited into an account
Fee charged when a loan is discharged
The difference between what you owe and what your property is currently worth
Exchange of contracts
An exchange of contracts is when the buyer and seller enter into a binding contract that commits them to the purchase/sale of the property
Fixed interest rate
An interest rate that allows you to lock it in for a set time period
When the lender formally approves your loan application
Full Doc loans are designed for borrowers who can provide full documentation of their income. This can include payslips, tax returns and other financial statements. Full Doc loans offer the customer greater options when it comes to loan choice as well as a lower rate.
When you have a verbal agreement with an agent or seller to buy a property at an agreed price but the property is not sold to you in the end
Guarantor Loan (or family pledge)
When to use the equity in another person’s property – usually a parent or close relative – as security to purchase a house of your own.
Total income before tax
Line of credit
A line of credit gives you a revolving credit account secured by the value of your house. This allows you to use the funds for any other purpose such as the purchase of a second property, or shares or other investments. The interest rate is generally higher than a standard variable rate and these accounts are not suitable for everyone.
Term applied to introductory loans. The rate can be fixed, capped or variable for the first 12 months to 3 years of the loan. At the end of the term the loan reverts to the standard variable rate
Interest only loan
Usually a short-term arrangement whereby payments are made on the interest only, not the principal
The holding of property by two or more people in equal shares
Loan to valuation Ratio (LVR)
This is the measure of the amount of the loan compared to the value of the property. For example, if you have borrowed $160,000 and your property is valued at $200,000, the LVR would be 80%
Lender / Mortgagee
The institution who lends the money
Lender’s Mortgage Insurance
Once you borrow over 80% [LVR], LMI becomes applicable as part of the application. This fee is used as a tool to get into the market with smaller deposit. LMI is incorporated into the loan and is repayable over time with accrued interest. Lenders Mortgage Insurance protects your lender against a loss should you as a borrower default on your home loan.
The person who borrows the funds
Where the return on an investment is insufficient to meet the costs of the investment, leading to a reduction in assessable income for taxation purposes
Gross income less tax
An offset account is a transaction account that can be linked to your home or investment loan. The credit balance of your transaction account is offset daily against your outstanding loan balance, reducing the interest payable on that loan.
E.g. You might have a $200,000 loan and $15,000 in your offset account. Because of your offset account, you will only be charged interest against $185,000.
Portable loans / Cross securisation
A portable loan allows you to sell your house and move to a new one without having to refinance. The main benefits of portability apart from not having to refinance is utilisation of stamp duty and not having to pay break costs if you are on a fixed rate
When a lender advises you in writing how much they will lend you, subject to lending terms and conditions
Principal & interest loans
Principal and Interest means that you pay the interest on the loan each month plus an amount that will repay your loan off in the defined term (for example, 30 years). A principal and interest loan will reduce the borrowed amount each month.
Allows you to access any additional repayments you have made on your loan
To move your loan from one lending institution to another
The completion of the sale transaction. Final payments are made at settlement in exchange for the relevant documents. The purchaser can then take ownership of the property
Usually a monthly fee levied to cover the cost of administering & maintaining the loan account i.e. fixed and variable costs such as staff, IT software / hardware
Combination of either a variable rate loan and a fixed rate loan or the combination of a standrard term loan and a line of credit
At a basic level, stamp duty is a tax imposed on numerous purchases, including real estate, cars and assets belonging to a business. When buying real estate, it is paid by the purchaser.
Stamp Duty varies between different states in Australia. However, it is generally based on the greater of two factors – the market value of the property or the price paid (including any GST) for the property.
Title that is commonly used for units, which forms part of the owners corporation
A fee charged where an existing borrower wishes to change from one loan type to another e.g. variable rate loan to fixed rate loan
Tenants in common
The holding of property by two or more people in equal or unequal shares
A document registered in the Land Titles Office recording the change of ownership
A report as required by the lender detailing a professional opinion of the property’s value
Variable Interest rate
Variable rate loans are loans that have an interest rate that will fluctuate over time in line with prevailing interest rates
If you want to learn more, attend a course!
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