Financial Jargon Explained
Serviceability
Serviceability refers to a lender’s assessment of whether you can comfortably meet the repayments on your home loan. This evaluation considers factors such as your income, expenses, existing debts and the potential impact of future interest rate changes.
Asset
An asset is something of value that you own. This may include savings, vehicles, investments or property. Lenders review your assets as part of their assessment of your overall financial position.
Loan to Value Ratio (LVR)
The Loan to Value Ratio (LVR) represents the percentage of a property’s value that is being financed through a loan. A higher LVR means a larger portion of the property is being borrowed, which may be considered higher risk by lenders.
Deposit
A deposit is the upfront contribution you make towards the purchase or construction of your home. A larger deposit reduces the amount you need to borrow and may improve your loan terms.
Pre-approval
Pre-approval is an initial indication from a lender that you may be eligible to borrow a certain amount based on a preliminary review of your financial position. While helpful for planning purposes, it is not a final loan approval.
Lender’s Mortgage Insurance (LMI)
Lender’s Mortgage Insurance is typically required when a borrower has a deposit of less than 20% of the property value. This insurance protects the lender in the event the loan cannot be repaid.
Stamp Duty
Stamp duty is a government tax applied to property purchases. The amount payable varies depending on the state or territory and the value of the property. In some cases, first home buyers may be eligible for concessions or exemptions.
Comparison Rate
The comparison rate reflects the total cost of a loan by combining the interest rate with most fees and charges. It provides a more accurate way to compare different loan options.
Fixed Interest Rate
A fixed interest rate remains the same for a set period of time. This provides certainty around repayment amounts during the fixed period.
Interest
Interest is the cost charged by a lender for borrowing money. It is calculated as a percentage of the outstanding loan balance.
Variable Interest Rate
A variable interest rate can change over time in response to market conditions. This means your loan repayments may increase or decrease during the life of the loan.
Construction Loan
A construction loan is designed for building a home. Instead of receiving the full loan amount upfront, funds are released in stages throughout the construction process.
Split Loan
A split loan allows you to divide your loan between fixed and variable interest rates. This can provide a balance of repayment certainty and flexibility.
Drawdown
Drawdown refers to the process of accessing funds from your approved loan. In construction loans, funds are typically drawn down progressively as each stage of the build is completed.
Principal and Interest (P&I)
Principal refers to the amount borrowed, while interest is the cost charged by the lender. Principal and Interest repayments reduce both the loan balance and the interest owed over time.
Equity
Equity is the difference between the current value of your property and the amount remaining on your home loan. As your loan balance decreases and property value increases, your equity grows.
Mortgage Broker
A mortgage broker is a finance professional who helps borrowers compare home loan options across multiple lenders and assists with the loan application process.