Frequently Asked Questions
Q: How does a Home Loan work?
A: A home loan comprises of principal and interest where the amount you borrow is the principal and what you pay to borrow is the interest. Generally the term of the home loan ranges between 20 to 30yrs. At the initial stages your loan repayments will mostly consist of interest along with a small amount paying off the principal.
Q. What is Interest?
A. The charge you pay for the right to borrow and use someone else's money. It's expressed as a percentage of the amount you borrow. Interest can be paid weekly, fortnightly, monthly or yearly. In a typical home loan, the early payments are mostly interest; as the amount of the remaining loan drops over time, the interest bill falls.
Q. What is Principal?
The money a lender lets you borrow to buy a home. When you buy a home, the principal of your loan, combined with your down payment, covers the total sales price. When you make payments to the lender each month, you pay back a portion of the principal as well as additional fees in the form of interest charges.
Q: What is the difference between fixed and variable interest rates?
Fixed rate remain unchanged for a set number of years while variable interest rate changes with movements in the banks interest rate and the Reserve Banks interest rates. Fixed rate loans are at times inflexible and might not allow you to make extra repayments or have substantial penalties for early repayments. You can split your loan into variable and fixed interest rates so that you can benefit from the security of a fixed loan along with the flexibility of a variable loan.
Q. What is an Interest only loan?
A. Only the interest is repaid throughout the course of the loan. The original amount or principal is repaid at the end of the term of the loan.
Q. What is a fixed rate loan?
A. A loan whose interest rate stays the same for a set number of years - the opposite of a variable rate.
Q. What is a Variable rate loan?
A loan whose rate changes as outside rates change – unlike a fixed rate, which stays the same for a set number of years. The outside rates are effectively set by the Reserve Bank, an independent authority that reports to Parliament. Depending on your arrangements with your bank, a change in your variable rate may not change your actual payments; instead, you may just pay off your loan faster or slower.
Q. What is a Split loan?
A. Still relatively unusual in Australia, a loan repaid partly at variable rates and partly at fixed rates.
Q. What is a Loan-to-value ratio?
A. A key measure of a loan’s strength, showing the amount owed as a proportion of the amount borrowed. Lenders will look carefully at this figure.
Q. What is a Flat interest rate?
A. Interest calculated on the original amount of the loan for the whole term.
Q. What is a Honeymoon rate?
A. A rate lower than the prevailing market rate, but which is raised to a higher rate after a short period - 12 months, for instance.
Q. What is the First Home Owner's Grant?
A government grants available to Australians buying or building their first home. The amount varies from State to State and terms and conditions apply.
Q. What is a Line of Credit?
An option which allows you to deposit all of your money in your loan account from which you can withdraw small amounts to meet your other expenses.
Q. What is a Mortgage?
A. A legal document expressing the terms and conditions applying to the lending of money secured by real estate.
Q. What is a Mortgage broker?
A. A person or organization offering loans from a panel of lenders. They can select the best loan or loans for a borrower, and then manage dealings with the lender on the borrower's behalf until the loan is established
Q. Who is a Mortgagee?
A. A Person or legal entity who lends the money.
Q. Who is a Mortgagor?
A. A Person or legal entity who borrows the money.
Q: What is Lender’s Mortgage Insurance?In a situation where you default on your repayments, lender’s mortgage insurance protects the lenders. If the property needs to be sold due to default and the sales proceeds fall short of the loan amount then the mortgage insurance will cover the shortfall.Mortgage insurance is a non-refundable amount that is paid during settlement when you borrow more than 80% of the value of the property.
QWhat is a Mortgage offset account?
A. An account used to pay off a home loan: the contents of the account are paid straight into the borrower’s home loan, reducing the amount left to be paid. Effectively, you deposit money in your mortgage instead of depositing it for the bank to lend to other people. In most ways, it works much like an ordinary savings account. So you can get your money when you need it (although with some offset accounts, you may need to give the bank or financier some notice). But by depositing extra money in your mortgage, you reduce your interest charges. You also avoid paying tax on the interest you would otherwise earn on your deposit - meaning you pay no more tax than you have to.
Q. What is an Asset?
A. The items you own and which are worth money in the open market – generally including your home, if you own it.
Q. What is Equity?
A. The value of the "slice" of the home that you actually own - as opposed to the debt, which your bank or other financier owns. The value of the "slice" of your home which you own outright – in other words, the amount of money you’d have if you sold the house and paid off your home loan. If you own a $200,000 home with a $120,000 loan, you have $80,000 of equity; if the market suddenly values your home at $220,000, your equity jumps to $100,000 while your loan stays the same. Your equity and debt in your home will together represent the home's value.
Q. What is Collateral?
A. An asset (such as a car or a home) which the borrower must give to the lender if the loan is not repaid. In a home loan, the home itself is usually the main collateral.
Q. What is a Deposit?
A. Usually, this is the sum that you contribute to the cost of buying your home.
Lenders normally want a deposit at least 10 per cent of the cost of the property, although some lenders will accept as little as 5 per cent. (When you finally buy a home, the seller will also ask for a different "deposit" - a sum, often 10 per cent of the purchase price that shows that you are serious about the purchase.)
Q. What is a Deposit bond?
A. An amount of money that guarantees the buyer of a property will pay the full deposit when it's due. Deposit bonds are often used to give reassurance when a buyer can't provide cash immediately.
Q. What is a Down payment?
A. The money that a home buyer pays to the seller upon the signing of the agreement of sale. The rest of the sale price is paid within a short period called a settlement period - typically, 90 days. The down payment may not be refundable if the purchaser fails to complete the purchase without good reason. Often the contract of sale will set out the acceptable reasons for failing to complete the purchase will be set out in the sale contract.
Q. What is an extra repayment?
A. An understanding that lets the borrower pay off the loan quickly by paying more of the loan than the minimum amount mentioned in the loan agreement.
Q. What is a Prepayment?
A. The act of paying off the loan ahead of schedule; it often attracts penalty fees.
Q. What is a Redraw?
A. A feature which lets you make extra payments on your mortgage and then “re borrow” the money when you need it. Typically redrawing extends the term of the loan or increases the repayments.
Q. What is an Application fee?
A. The fee a lender often charges to cover their costs in setting up a loan approval for a home buyer. Some lenders do not charge application fees, but these lenders tend to charge higher interest rates.
Q. What is an Account fee?
A. An account fee, charged by the lenders as the cost of introducing and maintaining a home loan.
Q. What is an Establishment fee?
A. An amount often charged by lenders to cover the cost of setting up new mortgages.
Q. What is an FID?
A. Financial Institutions Duty, a state duty which all financial institutions pay on the money paid to them.
Q. What is a Holding Deposit?
A. Refundable amount paid to the real estate agent when the buyer decides to purchase a property. It is a goodwill gesture, not necessarily, practice.
Q. What is Commission?
A. In home lending, the money that a lender pays to a mortgage broker when a borrower agrees to take out a loan through that broker. All brokers are paid commission. In real estate, the fee paid to real estate agent by owner for services rendered - usually for selling his/her property.
Q. What is the Comparison rate?
A. A single "artificial" percentage rate designed to capture all the costs of a particular loan, including fees and charges. The comparison rate came about because fees and charges have made it so much harder to compare home loans. A home loan with a 6.03% interest rate and no fees may end up costing you less than a 5.97% loan with a $10 monthly fee, a $600 valuation fee, redraw fees and a $2000 early-exit fee. Australia's lawmakers have agreed that for a three-year trial period, all lenders and brokers must provide comparison rates:
The comparison rate is based on a $150,000 loan paid off over 25 years. The comparison rate can be useful. Of course, it isn't perfect. It won't be so accurate if you're taking out a $400,000 loan that you expect to redraw from and then refinance in five years' time. And it requires borrowers to deal with two interest rates rather than one.
Q. What is a Comparison rate schedule?
A. A list of comparison rates designed to let you choose the comparison rate calculated on the basis which most closely matches your loan. A lender or broker must provide a comparison rate schedule whenever they give a borrower a loan application form.
Q. Who is the Reserve Bank?
A. The body responsible for maintaining Australia’s financial system, and for setting the official short-term interest rates on which many variable-rate home loans are based.
Q. What is a Credit Union?
A. A financial services co-operative owned and controlled by the people who use it.
Q. What is Internet banking?
A. The ability to transfer money between accounts pays bills, see statements and perform other financial transactions over the Internet.
Q. What is EFTPOS?
A. Electronic Funds Transfer Point of Sale - a facility provided by stores and service providers to let you pay for goods and services with your ordinary lender card, and often withdraw cash as well.
Q. What is the Term?
A. The length of time over which the loan is repaid – for a home loan, usually between 15 and 30 years.
Q. What is Serviceability?
A. The borrower's ability to make payments as they fall due (called “servicing” the loan).
Q. What is Stamp duty?
A. State tax paid by the purchaser, calculated as a percentage of the sale price of a property.
Q. What is Settlement?
A. Completion of a conveyance where the balance of the contract price is paid and ownership of the property passes from seller to buyer.
Q. What is Portability?
A. The ability to retain your existing home loan if you move homes, essentially replacing the old home’s security with the new ones.
Q. What is the Transfer?
A. A document registered at the Land Title Office and noted on the certificate of title, which verifies change of ownership of a property.
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