Decoding Mortgage Jargon

Have you ever looked up the home buying process only to find a guide littered with terms you don’t understand? Or maybe you’ve talked to a mortgage broker who used an acronym for every third word? We know how frustrating it can be to look for help only to find that you need a dictionary to understand what you find, so we’ve put together this handy guide to help you decode mortgage jargon.

AFCA. This is the Australian Financial Complaints Authority – an independent ombudsman service where people can make complaints about financial institutions.

Comparison Rate – this rate includes the interest rate, as well as other fees and charges associated with the loan. It’s designed to help people see the true cost of their loans and be able to compare different loan offers.

Equity – The current value of the property, minus the loan amount. It represents how much of your home you own. For instance, if your home was worth $800,000 and your loan was $500,000, then your equity is $300,000.

FBAA – This stands for Finance Brokers Association of Australia Limited. The FBAA is a leading national association for finance and mortgage brokers.

Interest Rate – The amount charged by banks or lenders for you to borrow money from them. Interest rates are calculated as a percentage of the loan amount you have left. So, if you have a $500,000 mortgage and an interest rate of 6% per year, you’ll be paying $30,000 in interest that year.

Interest Only – A type of home loan where you only pay back the interest on your loan rather than the interest and principal. These may be a good idea if you plan to sell the property after a short amount of time, like if you’re flipping it, but if you’re planning to live there long-term then only paying interest means you won’t reduce the loan or your repayments.

Lenders Mortgage Insurance (LMI) – If your loan is for more than 80% of your property’s purchase price, you’ll need LMI. This is an added cost that can be added to your home loan or paid as an upfront fee.

Loan Value Ratio (LVR) – LVR is amount you’re borrowing as a percentage of the property’s value. So, to calculate LVR you divide the loan amount by the value of the property and then times it by 100. A LVR of more than 80% will require Lender’s Mortgage Insurance.

MFAA – The Mortgage and Finance Association of Australia is the peak association for the mortgage and finance broking industry.

Offset – An offset account is a separate account that’s linked to your home lon. You can use it like any other transaction account, but any money in it is deducted from your home loan when calculating the interest you need to pay. If you have $50,000 in your offset and $500,000 on your loan then you’ll only pay interest on $450,000.

Principal – The loan amount you have borrowed from your bank or lender.

Redraw – Redraw facilities let you make additional payments off your home loan that can be taken out later if you need them. Unlike offset, a redraw is not a separate account that you can use for everyday banking.

Stamp duty – This is the tax you pay on your property when you buy a house. Stamp duty is different in each state and territor, but you can use our stamp duty calculator to see what it is in your state.