The Borrower’s Loan Glossary: The terms you need to understand before you get a loan
At some point, we all need to apply for a loan, whether it is for a home, an investment property, car or other purchase. While it can seem straightforward, particularly when you talk to a broker, there are still some terms you need to know to understand the fine print of your loan.
To help, we’ve compiled some of the most common terms and loan features you will come across and what they mean to compile the Borrower’s Loan Glossary.
Bridging Finance – This type of finance is available if you are currently selling your home and have already found the home of your dreams before it’s sold. Essentially it’s another home loan that you take out while you are waiting for your first home to sell. Bridging finance is mainly interest only.
Credit Rating – This is a rating given to borrowers based on their history of loans and repayments. Lenders will check on your rating by accessing a credit report to find out if you are a risk. Every bill you default on and every application for a loan whether you go ahead with it or not is recorded.
Depreciation – Depreciation is the amount you can claim on your investment property for items that have reduced in value due to time, usage and wear and tear.
Equity – This is the difference between what you owe on your home loan and the value of the property. If your home loan is $400,000 and your house is valued at $750,000, you have $350,000 in equity.
Fixed Interest Rate – This is when your interest rate is locked in for a fixed term. A fixed interest rate protects you against interest rate rises during the fixed term period.
Interest-Only Loan – With an interest-only loan, you only pay the interest on the amount you have borrowed. Interest-only loans are only for a set period of time after which you will need to pay both the principal and interest.
Lender’s Mortgage Insurance – Lender’s Mortgage Insurance is a once off insurance premium that protects the lender in the event you default on your mortgage repayments.
Loan Portability – This loan feature allows you to take your loan from one property to another. This can help you avoid refinancing and bridging loans if you are selling and buying at the same time.
Mortgage Protection Insurance – Mortgage Protection Insurance covers your mortgage repayment in the event you can’t work.
Negative Gearing – A property is negatively geared when the expenses exceed rental income.
Offset Account – An offset account is an account linked to your mortgage. The balance in the account offsets the principal of the loan. The overall interest is calculated on the principal less the offset account balance.
Offset Loan – Instead of being paid interest on your savings, which can be minimal, an offset loan allows you to make your money work for you by reducing the amount of interest on your home loan. With an offset loan, the interest payment due on the loan is calculated only on the net balance of the loan less the savings account.
Positive Gearing – A property is positively geared when the rental income received is greater than the total amount of the expenses.
Principal and Interest Loan – Principal and interest loans allow you to pay both the interest and loan off in repayments. This is more ideal when it is your own home as you are paying your loan off quicker. The repayments are higher than an interest only as you are making more of a dent in the loan.
Redraw Facility – Similar to mortgage offset loans, a redraw facility gives you access to your money any time. You can make additional payments into your home loan, and if an emergency arises, you have money in your mortgage to redraw. It can save you extra interest, and if things are going well, you can make additional payments.
Refinancing – People will often refinance to get a better interest rate deal or change to a different type of loan. It is also used when people may have multiple loans or debts that are hard to manage, so they consolidate it into one loan.
Reverse Mortgage – A reverse mortgage allows homeowners aged sixty or more to borrow against the equity in their home. No repayments need to be made until the house is sold or the owner dies. Although it can provide a sizable amount of money, the interest charged can eat into the rest of the equity.
Secured Loan – In a secured loan the property being purchased is held as security against the loan.
Split Loan – A split loan is when a portion of your loan is on a fixed interest rate and the other portion is on a variable interest rate. With a split loan the ratio is often flexible in that you can determine how much of the loan is fixed and how much is variable.
Unsecured loan – In an unsecured loan, no property is held as security, generally attracting a higher rate of interest due to increased risk on the part of the lender.
Variable interest rate – With a variable interest rate your interest rate will vary over throughout your loan depending on several factors, including the Reserve Bank’s current cash rate and your lender’s response.
Have questions about getting a loan? Our friendly team at MoneySmith can answer any questions you have and help you understand the fine print of your contract. Call us today on 1300 788 552.
