Ever had a conversation with a bank employee (or a mortgage broker) and it sounded like they were talking a different language?? You’re not alone – it happens all the time. It is because their vocabulary is littered with Jargon – which it shouldn’t be. So here is the first of some helpful Jargon-busters … I hope you find this helpful – remember, get a mortgage broker to help you – they are on YOUR side, not the banks.
Variable (Principal and Interest) home loans
The rate charged on a variable home loan moves up or down as the Reserve Bank changes official interest rates.
Basic variable loans are just what the name implies – “basic”!. Generally they have fewer features than other variable loans and are usually fee free. They don’t always have the best rate though – so don’t be tempted by the “no” or “low” fees – you could land up paying more in the rate.
Fixed Rate (Principal and Interest) home loans
A fixed-rate loan is a loan that has a fixed interest rate and therefore fixed loan repayments. You can choose the time period anything from 1 to 10 years. However, we recommend that you only consider fixing for a maximum of 2 to 3 years as your circumstances can change significantly during this period.
Although the fixed-rate period may be 3 years, the total length of the loan itself may be 25 or 30 years. At the end of the fixed-loan period you can decide whether to fix the loan again for another 1-5 years at current market rates or convert the loan to a variable interest rate for the remaining term of the loan.
Split Rate (Principal and Interest) home loans
A split-rate loan is a loan that has one portion of the loan fixed and one portion variable. You can select how much to allocate to each. This is a bit like “hedging your bets” – getting the best of both worlds by getting the flexibility of a variable rate low, the security of the fixed rate and spreading the risk across fixed and variable.
Interest-Only home loans
You repay only the interest on the principal (the amount of money you borrowed from the bank) for a period of 1-5 years. This can help get into the property market if cash flow is a bit tight or it can sometimes mean you can upgrade your purchase price to get something that little bit bigger (or nicer) or the difference between one suburb and another. The reason being is that the repayments are lower than with a standard principal and interest loan. At the end of the interest only period – usually 1-5 years – you must start making principal and interest repayments over the remaining term of the loan.
Line of credit home loans
This type of property loan allows access to funds when needed and is based on equity (the value less the debt) built up in your property. This allows you to raise funds for investment by providing cash up to a limit prearranged with a lender. Each month, the loan account balance is reduced by the amount of cash coming in and increased by the amount paid on the credit card or withdrawn in cash. As long as there is consistently more cash coming in than going out, these accounts can work well. However, they can be very costly if the balance of the line of credit is not regularly reduced. It requires an interest-only payment as a minimum each month, which can add up to a lot of interest over the long term.
Low-doc home loans
A low-doc or no-doc mortgage is ideally suited for investors or self-employed borrowers looking to refinance, purchase or renovate. Limited financial documentation is required but you will need between 20% to 40% deposit. And unlike a full doc loan – you will pay Lenders Mortgage Insurance if you borrow more than 60%.
Introductory home loan
The interest rate is usually low to attract borrowers. Also known as a honeymoon rate, this rate generally lasts only for around 12 months before it rises. Rates can be fixed or capped. Most of these loans revert to standard variable rates at the end of the honeymoon period so be sure to check with a mortgage broker first – these can land up costing you much more in interest in the long run.
By Sandra Crossland
Sandra is a qualified Mortgage Broker with a Diploma of Financial Services (Finance/Mortgage Broking Management FNS50504) and has been helping people achieve their dreams of home ownership since 2006.