A to Z of home buying
A-L | M-Z
Buying a home, especially your first, can feel a little daunting at times. It’s a big decision after all. There are lots of acronyms, unfamiliar terms and ‘bank-speak’. At Great Southern Bank, we’re here to help make your first home buying experience easier with our A to Z of home buying. Here’s the first part A to L.
This is any extra money you pay on top of the minimum repayment amount required for your home loan. Additional repayments can help you pay off your loan faster and pay less interest over the course of your loan. And because it’s extra money, above what’s required to meet your loan obligations, in most cases you can ‘redraw’ that money if you need to. Most variable rate home loans allow unlimited extra repayments and the ability to redraw them later, while fixed rate home loans usually have some restrictions on extra repayments.
These are the fees charged by the lender to cover or partially cover their costs of processing a new loan application. Also known as ‘establishment fees’, they may include the cost of valuing your property.
When you apply for a home loan, the lender will ask you to list all the assets you currently own to help ascertain your financial position. Your assets will include things like real estate properties, savings account balances, cars, the contents of your home, superannuation, shares or other investments you may have.
Auctions are a popular way for properties to be sold. Conducted by a qualified auctioneer hired by the seller, auctions are public sales staged at a specific time and aim to have the property sold by the end of the auction. Potential buyers need to register for the auction before it begins. Once the auctioneer starts the auction, registered bidders compete against each other by making higher offers. The property is usually sold to the highest bidder, providing the reserve price has been reached and the property is “on the market”. Auctions are unconditional and do not have a cooling-off period, so you will need to have your finances sorted and any building and pest inspections performed prior to auction. Specific auction rules can vary between states.
If you’re buying a unit, apartment or townhouse that has common property areas (gardens, lifts, pools, gyms, etc...) there will usually be a management group that handles the administration, control and maintenance of all these areas. Usually paid quarterly, body corporate fees are paid by each unit owner and pay for any repairs or improvements that have been approved by the owners and the body corporate.
Borrowing power or capacity
This is the maximum amount you could borrow from a lender. It will depend on your income, expenses and other financial commitments. Many calculators are available to give you an idea of your borrowing power.
Fixed rate home loans offer greater certainty of your monthly repayments for a specified period (usually 1 to 5 years). However, if you need to end this period early (e.g. if you sell your house), you may need to pay a ‘break cost’ that covers the lender for the lost interest income. It’s best to check what the break costs are before you end your fixed rate loan. Also known as Early payout fees.
These are special home loans that are often used to help you between buying and selling properties. They’re used by people who buy a new home before selling their existing home or who are building a brand new home.
Building and pest inspection
Before you buy, you’ill need to get a building and pest inspection to check the property is structurally sound and free of pests, like termites. The inspection ideally needs to be completed before contracts are exchanged, or it can be a standard condition inserted into the contract, where the buyer has a certain time period (commonly 7-14 days) to arrange for an independent building and pest inspection of the property. This will be an out of pocket expense for you, so make sure the inspector is licenced with your state government authority and ask what exactly will be included in the report.
Building insurance covers your house, garage and other structures against damage or theft due to events like severe weather, fire and vandalism. Check with your solicitor, but in most cases, you’ll become responsible for the property from 5pm the next business day after the contract date so you should consider having your new home insured from then, rather than from the settlement date.
If you sell a property for more than you paid, this is called a capital gain.
Capital gains tax
This a Federal Government tax you may need to pay if you make a capital gain from the sale of a property bought after 20 September 1985. If the property is your main residence, it is exempt from capital gains tax. There are some other exemptions, so check with the ATO.
Certificate of title
A document (electronic or paper) that has all the ownership details of a property. If the property already has a mortgage on it, those details will appear as well. Not all states and territories have certificates of title.
When loans are advertised, lenders must show the interest rate and the comparison rate. The comparison rate includes both the interest rate, as well as the upfront and on-going loan fees and charges – expressed as a percentage. This allows borrowers to easily compare loans – like apples and apples. In fact, you should always consider comparing the comparison rates and look for a comparison rate that’s close to the interest rate.
Building insurance only covers your home, garage and other structures, so you will need to consider covering the contents with a separate insurance policy. Contents insurance covers things like furniture, appliances, clothing, jewellery, etc… against theft and damage. If you have higher value items you may need to specify these on the policy, as well as items you want to insure away from home such as laptops, mobile phones and jewellery.
Contract of sale
This is what both parties (the seller and the buyer) sign. It’s a written agreement that clearly outlines the terms and conditions (the price, deposit, settlement date, finance clauses, building and pest inspection conditions, etc…) for the purchase or sale of a property. You may like to engage a solicitor to review a contract of sale before you sign it.
These loans are for the building of a new apartment or house. Since the property isn’t built yet, a construction loan releases funds to the builder over stages as the building progresses.
Buying and selling a property has a lot of paperwork. Enter the lawyers! Conveyancing is the legal process of transferring property ownership from the seller to the buyer.
Having second thoughts about that ‘renovator’s delight’ after your offer was accepted? Most contracts have a 'cooling-off period' where the buyer may be able to withdraw from the sale after contracts have been exchanged. Check what’s applicable in your state.
Credit score / Credit rating
Unless you’re a millionaire with loads of cash, there’s a good chance you’ll need to borrow money to buy your first home. Since it’s usually a reasonable sum of money, lenders like to ascertain the risk of you paying the money back to them before they lend you the money. To do this, they conduct an assessment of your credit-worthiness, based on your borrowing and repayment history. Your credit rating will help the lender decide whether or not to give you a loan and how much you can borrow. Remember, missing or late payments on things like “buy now pay later” schemes will show up on your credit history – even though they don’t feel like a loan. If you want to find out what your credit score is, there are plenty of websites available for this.
When you don’t make a repayment on time this is considered a default. Your credit contract will outline when your repayments are due, what the conditions are and what happens if you don’t meet your contract conditions. If you’re experiencing financial difficulty, talk to your lender early. You may be eligible for a repayment pause or a financial relief package.
With any large purchase, a deposit of some sort is usually required to secure the item. Homes are no different. A deposit between 5% to 10% of the purchase price is commonly paid into the real estate agent’s trust account once your offer is accepted. It’s your initial contribution to the purchase of your home. Generally, if you have a deposit of 20% or more for your new property purchase it can mean you avoid paying Lenders' Mortgage Insurance (LMI) and even get you a better interest rate.
In the lead-up to settlement, your solicitor or conveyancer pays various fees to other organisations and bodies on your behalf. These can include search fees and stamp duty/ land tax. All these costs or disbursements will be itemised on the invoice from your solicitor or conveyancer.
If you happen to win lotto or just want to sell up and pay out your home loan in full, your lender may charge a discharge fee. Also called ‘termination’ fee, it’s commonly an admin fee of a few hundred dollars to remove the mortgage from your property.
Early Payout Fee/Economic Cost
Fixed rate home loans offer greater certainty of your monthly repayments for a specified period (usually 1 to 5 years). However, if you need to end this period early (e.g. if you sell your house), you may need to pay a ‘break cost’ that covers the lender for the lost interest income. It’s best to check what the break costs are before you end your fixed rate loan.
Some properties have a passage of land that’s owned by another property owner. There is usually an agreement in place giving you the right to use, but always ask.
This is a very fancy term for an outstanding liability or charge on a property, like the current owner’s mortgage. If the property you want to buy still has money owing on it, that’s an encumbrance.
The difference between the amount you owe on your home loan and the current value of your property. The more you pay off your loan and the more your home grows in value, the more equity you’ll have. Many home owners use their home equity to fund renovations, or as a deposit on an investment.
The lender’s fees to set up your loan, which can include doing a valuation of your property. Also see Application fee.
Finance clause or finance date
In the contract of sale, you and the seller can stipulate certain conditions of the sale. If you don’t have finance approval for your loan, you can add a ‘subject to finance’ condition or clause into the contract. It means that if you can’t get finance by a certain date (say 14 to 30 days from signing of the contract), the conditions haven’t been met and the contract may fall through.
If you’re struggling to reach your 20% deposit goal and want to avoid paying Lenders' Mortgage Insurance (LMI), you can ask your family for help with a Family guarantee. By going guarantor, your family member is allowing the equity in the property they own to be used as security for your loan.
First Home Loan Deposit Scheme (FHLDS)
A Federal Government initiative that assists eligible first home buyers to buy a home with as little as 5% deposit. The FHLDS is only available through approved lenders and scheme allocations are usually limited to 10,000 per year.
First Home Owners Grant (FHOG)
This is a Federal and State Government scheme to assist first home buyers. The amount of assistance and eligibility criteria vary. It’s usually paid directly to your lender and may be used as a contribution towards the loan. To see if you qualify and meet your state’s conditions, visit www.firsthome.gov.au.
Fittings are all the items that can be removed from a property without causing damage to it. If there is a fitting you want the seller to leave in your new home, it must be specified in the contract for sale.
Fixed interest rate
This is one type of home loan where the interest rate is set for an agreed fixed period. Fixed rate home loans offer borrowers more certainty than variable rate home loans, as the interest rate, and therefore your repayment, doesn’t change for the specified term (usually between 1-5 years). At the end of the fixed rate period, the interest rate usually reverts to a variable interest rate, unless a further fixed rate period is agreed with the lender.
Unlike fittings, fixtures are items that would cause damage to a property if they were removed. If the seller wants to take a fixture, it must be stipulated in the contract and any damage paid for by the seller.
A freehold title gives the purchaser complete and indefinite ownership of a property and the land on which it stands. Some states sell land with a Leasehold Title. See “Leasehold” for more information.
Gearing is more related to investment properties where an income is received. It’s the ratio of rental income compared to the loan repayments over the same period of time. A property can be positively or negatively geared. If rental income is less than the loan repayments and other property expenses, it’s considered negatively geared. If more, it’s positively geared.
When you’re borrowing for a home loan, the lender just doesn’t consider the deposit you have. After all, you may have been given the money as a gift. Lenders want to see that you have a regular savings pattern and the ability to meet regular home loan repayments. They’ll look at your bank account statements to see savings patterns over three months, or that large amounts like your deposit can be held for that period as well. They may also consider other loan repayments you make and your rental history as proof of being able to save.
Government fees & charges
A range of government fees and charges that vary by state. Check out our government fees calculator to get an idea of what you’ll be up for. Be aware that lenders may not finance these fees as part of your loan. You’ll have to cover these costs on top of your deposit.
See Family guarantee. In simple terms, someone (usually a family member) is guaranteeing to the lender that you will meet your loan obligations. They will also put their own property up as security. If you default on the loan, the family member guaranteeing your loan will be responsible for the repayments.
Everyone loves a low interest rate. But you should be aware of introductory or “honeymoon” rates on home loans. They usually offer a lower interest rate for an introductory period (usually the first couple of years of the loan), then revert to a higher rate once the honeymoon or introductory period ends. Make sure you know the rate and can afford to meet the repayments once the introductory period ends.
These are items that are included with a property, such as curtains, light fittings, stove, etc… These must be specified in the contract of sale.
For loans, this is the lender's charge (usually expressed as a percentage) for using their funds. Loans can have variable or fixed interest rates, or even a combination of both with a split loan.
Interest only repayments
When you take out a home loan you can choose from two types of repayment options – interest only, or principal and interest. Interest only repayments are where you’re only repaying the interest with your monthly repayment – you won’t be paying anything off the balance borrowed also known as the principal. These types of repayment are usually limited to a specified time (between 1 to 5 years) and revert to principal and interest repayments for the remainder of the loan term.
Investment home loan
When you apply for a loan you’ll be asked whether it’s for an owner occupier (if you’ll be living in the purchased property), or for an investment (if you’ll rent out the property). Interest rates vary depending on this and other factors. It’s part of your loan agreement that if you change the use of the property that your lender is informed immediately.
Where property ownership is held equally between two or more people. Should one person pass away, their share passes to the survivor(s) – it cannot be bequeathed under a will.
Some contracts to purchase land are under a Leasehold title. When purchasing a property as Leasehold, you own the land for a particular length of time e.g. 100 years.
Lenders' Mortgage Insurance (LMI)
This is a one-off insurance payment which protects your mortgage lender if you default on the loan. LMI is commonly paid when borrowers have less than a 20% deposit. The premium can vary depending on the lender, loan amount and deposit size. Most lenders allow you to choose if you’d like to pay it upfront or add this to your loan amount and include in your repayments.
Lenders like to know what liabilities or debts you have before they lend money to you. These can be home, car or personal loans, credit cards, as well as your “buy now pay later” commitments.
These documents include your loan contract, all the terms and conditions, as well as your mortgage document, which is lodged by your lender with your state or territory Titles office. You’ll need to review, sign and return these to your lender before settlement.
It’s the number of years that you agree to repay your home loan, generally 30 years or less.
Loan to valuation ratio (LVR)
Expressed as a percentage, LVR is the amount of the loan compared to the value of the property that’s being used as security. For example, the home you’d like to buy is valued by the bank at $400,000 and the loan you need to purchase it is $320,000. To get the LVR: $320k ÷ $400k = 80% LVR.
The LVR is set at the time of your loan approval, based on the bank’s valuation of your property (which may differ from the amount you paid on the contract). From a lender’s perspective, the higher the LVR, the higher the cost and risk to the lender, which is why you’ll often see higher rates for higher LVR applications. Apart from getting a better rate, having 80% or lower LVR also means you could avoid paying Lenders' Mortgage Insurance (LMI).