Australian Home Loan Terms Explained
Buying property in Australia comes with a lot of unfamiliar mortgage terminology. This guide explains the most important Australian home loan terms in plain English, with examples, LVR calculations and links to useful tools.
Australian home loans involve more than just the amount you borrow and the interest rate you pay. Terms such as LVR, LMI, equity, comparison rate, offset account, redraw, pre-approval and borrowing capacity can all affect how a home loan is understood and assessed.
This guide explains these terms in practical language so you can understand how they relate to buying, owning or refinancing property in Australia.
For example, a $640,000 loan against an $800,000 property produces an 80% LVR.
Calculate your LVR →What is LVR?
LVR stands for Loan-to-Value Ratio. It shows how large a loan is compared with the value of the property securing it.
LVR is one of the key concepts to understand when comparing home loan scenarios in Australia.
A lower LVR means the loan represents a smaller proportion of the property's value. However, LVR is only one factor lenders may consider when assessing an application.
Loan Amount
The loan amount is the amount you borrow from a lender to purchase, refinance or improve a property.
When calculating LVR, the loan amount is compared with the relevant property value.
Deposit
A deposit is the amount you contribute towards a property purchase rather than borrowing it through the home loan.
For example, a $160,000 deposit toward an $800,000 property represents 20% of the purchase price, before considering other transaction costs.
Home Equity
Home equity is broadly the difference between the current value of a property and the outstanding debt secured against it.
Equity can change as the loan balance changes or the value of the property changes.
Having equity does not automatically mean that the full amount can be borrowed. A lender may apply its own LVR and serviceability requirements.
Calculate your equity and LVR →Property Valuation
A property valuation is an assessment of what a property may be worth.
For lending purposes, a lender may rely on a valuation or another accepted method of assessing property value.
The value used by a lender may not always be identical to the property's purchase price or an owner's estimate of market value.
Property Valuation in the LVR Glossary →Lenders Mortgage Insurance (LMI)
Lenders Mortgage Insurance (LMI) is insurance that may protect a lender against certain losses if a borrower defaults.
LMI may apply to some higher-LVR loans, depending on the lender, loan product and borrower circumstances.
This is why an LVR percentage should not automatically be treated as a guarantee that LMI will or will not apply.
Interest Rate
The interest rate is the percentage charged by a lender on the amount borrowed.
Home loan interest rates can differ between lenders and loan products and may change over time.
The interest rate is important, but it should not be considered in isolation. Fees, loan features, repayment structure and other conditions can also affect the overall cost of a loan.
Comparison Rate
A comparison rate is designed to give borrowers a broader indication of the cost of a home loan by incorporating the interest rate and certain fees and charges.
Comparison rates are particularly useful when comparing certain Australian home loan offers, but they should still be considered alongside the loan's features and your circumstances.
Fixed Rate vs Variable Rate
Fixed-rate home loan
A fixed-rate loan generally locks the interest rate for an agreed period.
Variable-rate home loan
A variable-rate loan has an interest rate that can change over time.
Some Australian borrowers also use loans that combine fixed and variable portions.
Offset Account
An offset account is generally a transaction account linked to an eligible home loan.
The balance in the offset account may be taken into account when calculating the interest charged on the linked loan, depending on the product's terms.
Actual treatment depends on the loan product, so always check the lender's terms.
Redraw Facility
A redraw facility may allow eligible borrowers to access additional loan repayments they have previously made, subject to the loan's terms and conditions.
Redraw and offset facilities are not necessarily the same thing. Their availability, access conditions and tax treatment can differ depending on the loan and how the property is used.
Home Loan Pre-Approval
Pre-approval, sometimes called conditional approval, is an indication from a lender that you may be able to borrow up to a particular amount, subject to conditions.
Pre-approval is generally not the same as final loan approval. The lender may still need to assess the property, documents and other requirements before settlement.
Borrowing Capacity
Borrowing capacity refers to an estimate of how much a lender may be willing to lend based on factors such as income, expenses, debts and lending criteria.
Borrowing capacity is different from LVR.
Looks at the relationship between the loan and property value.
Looks at whether your financial circumstances support the proposed borrowing.
Stamp Duty
Stamp duty, also called transfer duty in some Australian jurisdictions, is a government tax that may apply to certain property transactions.
The amount and rules vary between Australian states and territories and may depend on factors including the property, purchase price, buyer circumstances and whether concessions apply.
Conveyancing
Conveyancing is the legal and administrative process involved in transferring property ownership from one party to another.
Buyers commonly engage a conveyancer or solicitor to assist with contracts, searches, settlement and other legal aspects of the transaction.
Guarantor
A guarantor is a person who agrees to support a borrower's loan obligations under specified circumstances.
Some Australian home loan arrangements may involve a family member or another eligible person providing a guarantee to assist with borrowing.
Refinancing
Refinancing generally means replacing an existing home loan with a new loan, often with a different lender or loan structure.
Borrowers may consider refinancing because of changes in interest rates, loan features, financial circumstances or property value.
Your LVR can be relevant when refinancing because the proposed loan amount is assessed against the relevant property value.
Calculate your refinance LVR →Home Loan Repayments
Home loan repayments are the amounts paid toward a mortgage. Depending on the loan structure, repayments may include principal, interest or both.
Common repayment frequencies include weekly, fortnightly and monthly arrangements, although the options available depend on the lender and loan product.
Know the terms that matter most
Calculate your LVR in seconds.
Enter your loan amount and property value to estimate your Loan-to-Value Ratio.
This article provides general information about Australian home loan terminology and is not personal financial, credit, mortgage, legal or tax advice. Lending criteria, interest rates, fees, government charges and loan features can change. Consider your circumstances and obtain appropriate professional advice before making significant financial decisions.
