Basic Mortgage Terms in Australia

Thinking about buying a home in Australia? Understanding how a mortgage works and common mortgage terms can make the process easier. Here’s a simple guide to help you with the basics.

How Does a Mortgage Work?

A mortgage is a loan that helps you buy a property. The lender provides the money, and you agree to pay it back over time, usually in monthly repayments. Each payment includes two parts:

• Principal: The amount you borrowed.
• Interest: The cost of borrowing the money.

Most mortgages are long-term loans, typically lasting 20-30 years. During this time, you gradually pay off the loan. If you miss repayments, the lender has the right to take back the property (this is called foreclosure or repossession).

1. Mortgage

A loan used to buy a property. The lender provides money, and you pay it back with interest over time.

2. Loan-to-Value Ratio (LVR)

LVR is the percentage of the property’s value that you borrow. For example, if a house costs $500,000 and you borrow $400,000, your LVR is 80%.

3. Deposit

The money you pay upfront when buying a home. A higher deposit usually means better loan terms.

4. Interest Rate

The cost of borrowing money, shown as a percentage. A lower rate means lower repayments.

5. Fixed Rate Loan

A home loan where the interest rate stays the same for a set period (usually 1-5 years).

6. Variable Rate Loan

A home loan where the interest rate can go up or down based on the market.

7. Split Loan

A mix of fixed and variable rate loans, giving flexibility in repayments.

8. Offset Account

A bank account linked to your loan. The money in the account reduces the interest you pay on your mortgage.

9. Redraw Facility

Allows you to withdraw extra repayments you’ve made on your mortgage.

10. Lender’s Mortgage Insurance (LMI)

A fee you pay if your deposit is less than 20% of the property’s value. It protects the lender, not you.

11. Pre-Approval

A lender’s confirmation of how much you can borrow before you buy a property.

12. Stamp Duty

A tax on property purchases. The amount depends on the property’s price and location.

13. First Home Owner Grant (FHOG)

A government grant for first-home buyers to help with the purchase. Rules vary by state.

14. Principal & Interest Loan

A loan where you repay both the amount borrowed (principal) and interest over time.

15. Interest-Only Loan

A loan where you only pay interest for a set period before starting to repay the principal.

16. Refinancing

Switching your loan to a different lender or a better loan to save money or access new features.

17. Mortgage Broker

A professional who helps you find and apply for a home loan that suits your needs.

18. Repayment Frequency

How often you make loan payments—monthly, fortnightly, or weekly. Paying more often can reduce interest costs.

19. Default

When you miss repayments on your mortgage. This can lead to penalties or losing your home.

20. Equity

The difference between your home’s market value and what you still owe on the mortgage. More equity can help with refinancing or getting another loan.

Final Thoughts

Understanding how a mortgage works and these basic terms can help you make better financial decisions. Have questions? Reach out to a mortgage broker for expert advice!

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