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Mortgage Calculator - Glossary of Important Terms

Amortising loan: Also known as a principal and interest loan. Both principal and interest are paid down over the life of the loan in scheduled, periodic payments, typically in equal amounts, according to an amortization schedule.

Application fee: The upfront fee charged by the lender to set up your home loan. This fees usually cover the internal costs of the lender for assessing the application. The application fee is also called as an upfront fee.

Breakcost fee: The fee charged as penalty in case you break or end a fixed interest rate loan before the agreed period. This fee is usually levied if you try to switch providers or try to pay out the loan early.

Bridging finance: Short-term finance used where a buyer settles on their new home before settlement of their old home.

Comparison rate: The rate which takes into account fees and charges included in a mortgage such as application fees and ongoing fees. The comparison rate thus gives you a more precise representation of the loan's interest rate after all costs are taken into account. As per Australian law, all home loan lenders must display the comparison rate next to their advertised interest rates. This comparison rate makes it easier for buyers to check out which home loan gives better overall benefits. However, the comparison rate works only in the same scenario, for example, $300,000 over 25 years.

Conditional pre-approval: Given by the lender after reviewing the buyer’s financial situation and creditworthiness. This is done to determine the eligibility of the buyer for a home loan up to a certain limit. It is an estimation by the lender on how much they are willing to loan you, subject to conditions. Note that this not the same as the acceptance of the application for the home loan. A conditional pre-approval can be used by the potential buyer to fix their budget before finally zeroing in on the property and making an offer, and then applying for formal approval from the lender.

Conveyancing: Legal work carried out in relation to buying or selling real estate.

Credit report: A report displaying the borrower's credit history.

Debt Servicing Ratio (DSR): A measure of the proportion of the borrower's earnings required to make loan repayments. Used by lenders to assess the borrower's ability to meet repayment obligations.

Deposit / downpayment: The difference between the purchase price and the mortgage amount, paid directly by the borrower. For example, if a buyer has borrowed $400,000 on a $500,000 house, they would pay a $100,000 deposit.

Equity: The current value of the property, less the mortgage principal outstanding. For example, if the property is worth $500,000, and the mortgage has $200,000 principal owing, equity would equal $300,000. Equity increases whenever the principal of the mortgage is paid off and / or the market value of the property increases.

Extra repayments facility: The ability to make additional repayments on a mortgage in addition to the minimum required repayment, typically without penalty.

Fixed interest rate: The interest rate that is applicable for a fixed term to the mortgage. During the term, the interest rate remains fixed irrespective of variations in the RBA cash rate.

Formal approval: Also called unconditional approval; given when the lender has all necessary records required for the mortgage. Typically provided after the borrower has made an offer on a property, and the lender has valued the property.

Headline rate: The interest rate charged by the lender on a day-to-day basis.

Home loan top up: Approval to borrow additional amounts once there is significant equity in the property. A top up can be used by buyers to fund renovations, travel, new car etc. without resorting to applying for additional loans.

Honeymoon rate: A discounted interest rate, applicable for a limited period, to attract new borrowers.

Interest-only loan: A loan where the borrower makes interest repayments but not principal repayments with a typical term between 1 to 5 years. For example, if a borrower is paying a $500,000 interest-only loan with a set term of 5 years, the amount outstanding at the end of the 5 year period would still be $500,000. At the completion of the term, the lender may convert the loan to a principal and interest loan, resulting in higher repayments for the borrower.

Lenders mortgage insurance (LMI): Insurance designed to provide protection for the lender, and offering no protection to the borrower. The LMI covers the lender if a borrower defaults on a loan and the outstanding debt is unable to be recovered by the sale of the property. The LMI is typically mandatory for loans that the lender considers higher-risk, and specifically in cases where the amount borrowed is more than 80% of the property value.

Line of credit facility: A flexible loan arrangement that can be used at a customer’s discretion. It is similar to an overdraft facility and comes with a specified limit.

Loan to value ratio (LVR): The percentage of the loan amount when compared to the value of the property for which the loan is availed. For example, if the property is worth $600,000, and the mortgage is $250,000, the the LVR would equal 41.7%.

Low doc / lite-doc / alt-doc mortgage: A home loan designed for borrowers who are self-employed and who are unable to provide standard documentation such as payslips. May have higher interest rates and fees.

Mortgage / home loan: A loan used to purchase real estate

Mortgagee: The lender

Mortgagor: The borrower

Offset account: A savings account linked to a home loan, into which the borrower can deposit additional monies to reduce interest payable. For example, if a mortgage has an outstanding balance of $600,000 and an attached offset account has $50,000, interest will be calculated on $550,000.

Portability: The ability to use a different property as the security for an existing loan. Useful when moving from house to house without setting up a new mortgage.

Principal: The amount outstanding on a loan, on which interest is calculated.

RBA cash rate: The official interest rate set by the Reserve Bank of Australia, which influences the interest rates set by banks and non-bank lenders.

Redraw facility: A facility that enables the borrower to make extra repayments on the mortgage, and also redraw that money later if required.

Refinance: When a borrower switches their mortgage to a different lender, typically to secure a lower interest rate or different features.

Repayment holiday: When the lender allows the borrower to stop making repayments of principal and interest for an agreed period of time. Typically applicable for lower-risk borrowers who are ahead in repayments.

Secured loan: A loan secured by an asset. A mortgage is a secure loan, with the real estate used as security.

Settlement: The time at which the title of the real estate is transferred from the vendor to the buyer.

Split rate loan: Part fixed interest, part variable interest.

Valuation fee: A fee charged by the lender to seek professional opinion from a Valuer to identify the market value of the real estate subject to purchase.

Variable interest rate: A mortgage interest rate that fluctuates up or down over time, typically prompted by adjustments in the RBA cash rate.

Vendor: The person or entity selling the real estate being purchased by the borrower.

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