Let’s go back to basics. You know that a home loan funds the purchase of a property, but do you know what all the jargon associated with a home loan means? If not, hopefully the following is helpful.
Interest rate
Likely the most important part of a home loan for most people, the interest rate is what you are charged on top of your loan balance, and it’s expressed as a percentage. This percentage is called the Annual Percentage Rate (APR).
Comparison rate
Put simply, the comparison rate shows the cost of borrowing the principal amount of your loan plus fees and charges that are added on, and it represents the overall cost to you. There is a set formula that all lenders use to calculate the comparison rate which is designed to help with comparing different home loan options.
Want to know more about comparison rates? Read our blog article on why they’re important.
Repayments
You pay your loan off in instalments, and these are called repayments. The minimum repayment amount will be based on the loan balance, term, and interest rate applicable. If you have an initial interest-only term, then the repayments will only cover the interest charged at the end of each month.
To work out how much interest you’ll be charged, multiply your principal amount by your interest rate and divide by 365 (for the days of the year). For example:
$450,000 x 5.50% / 365 or 450,000 x 0.055 / 365
= $67.81 daily interest x days in the month
= $2,102.11 interest charged in a month with 31 days.
The permitted frequency of repayments can sometimes differ between lenders, but you can usually choose to make your repayments weekly, fortnightly, or monthly. Some lenders will also allow you to make extra repayments.
By making extra repayments, or paying more than the minimum amount, you can pay your loan balance down sooner and reduce the amount of interest you are charged.
Principal
When you hear ‘principal’ used in relation to a home loan, it’s referring to the amount the loan is for. For example, if the amount you are loaned is $450,000, that’s the principal amount.
Look out for ‘principal and interest loans’ and ‘interest-only’ when comparing your options. As you can probably already guess, a ‘principal and interest’ loan means your repayments will go towards paying off both whereas for an ‘interest-only’ loan they cover only the interest being charged.
Term
This is the length of time you agree to pay off your loan balance. Typically, the maximum loan term will be 30 years, but this varies between lenders and the home loans they offer. If you make extra payments to your loan, you can reduce the length of the term.
If you choose a fixed rate home loan, then the term can also refer to the number of years you have set your interest rate for, and not just the overall length.
Maximum Loan Value Ratio
Loan Value Ratio (LVR) is the amount of the loan against the value of the property being purchased and provides as security. For example, if you buy a property for $450,000 but the loan amount is for $360,000 because you have a $90,000 deposit, your LVR is 80%.
It’s not uncommon for lenders to offer loans with lower interest rates to lower LVR customers. The maximum loan value ratio of a home loan allows you to easily see if you could be eligible for a loan.
Bear in mind that the lender will determine if you need to pay Lender’s Mortgage Insurance (abbreviated to LMI) when your LVR is higher than 80% and other factors of their credit policy apply.
Owner occupied
If the property being purchased is to be your primary place of residence, then the loan is called an 'owner occupied' loan. You could also purchase a property for investment using an 'investor' home loan, and a ‘bridging’ loan is a solution for when you’ve found your next home but haven’t yet sold your existing property.
Fees
Application, establishment, monthly, annual, and ongoing… There are several different types of fees that can be charged on a home loan, and different lenders and loans will charge different fees and amounts.
Ensure you’re looking at the comparison rate when searching for a home loan, as this will give you an indication of the extra charges associated with the loan as we’ve mentioned. You should also make sure you have read and understood the loan terms and conditions relating to the loan too.
With a P&N Bank home loan, there are no establishment, monthly or annual fees. Take a closer look at our home loans to learn more – and if you want to know more about the costs involved with buying a home, visit our blog.
Offset
An offset account is a transaction account linked to a home loan. The balance in this account offsets the balance of the loan and reduces the amount of interest charged on the loan. For example, if your loan balance is $450,000 and you have $15,000 in the offset account, you’ll only pay interest on $435,000.
Different lenders offer different offset options. When you’re looking for a loan with an offset option make sure you know whether it is a 100% offset account, or a partial offset. You’ll also need to take note of any extra fees you may be charged for having an offset account linked to your home loan.
Redraw
If you make additional payments to your loan and your lender allows you to redraw, it means you can withdraw the extra funds you’ve paid. Just like with an offset account, the extra money in your redraw can reduce the amount of interest you pay.
Learn more in our Redraw vs. Offset: What’s the difference? article.
When it comes to buying a property and getting your first home loan, no question is a silly one. Our home loan specialists can help you get the answers you need – just use the enquiry form to get in touch with us. If you have a broker, they'll also be able to assist.
Banking and Credit products issued by Police & Nurses Limited (P&N Bank) ABN 69 087 651 876 AFSL/Australian Credit Licence 240701. Any advice does not take into account your objectives, financial situation or needs. Read the relevant Product T&Cs, before acquiring this product in considering and deciding whether it is right for you. The Target Market Determination (TMD) for products are available on request. Lending criteria, terms & conditions, fees & charges apply.