Home Loan Terminology Explained
Updated: 6 hours ago
An offset account is a savings account related to your home loan. It 'offsets' the principal of your loan so that the interest payable on the loan is reduced. For example, if the balance on your home loan is $250,000 and at the same time you have $10,000 on your offset account. Assuming an interest rate of 6%, then you would only need to pay interest of (250,000-10,000)*6% = $14,400. In other words, you only pay interest for the $240,000 borrowed.
A redraw facility is usually attached to flexible rate loans and some fixed rate loans. The redraw facility allowsaccess to the extra repayments that you have made on your loan above the required minimum repayments.
For instance, if the monthly minimum repayment on your loan is $700, but your actual monthly repayment amounted to $900, then after 12 months your additional repayments will sum to (900-700)*12 = $2,400. The redraw facility allows you to access the $2,400.
Loan to Value Ratio
The loan to value ratio is commonly referred to as LVR. As its name suggests, it is the ratio of the loan amount and the value of your property. LVR for a first mortgage is usually 70-80%.
An ‘interest-only’ home loan means that a borrower only pays the interest component of the loan. The principal (original borrowed amount) of the loan will be repaid in a lump sum at the end of the home loan period or when the property is sold. Interest-only loans can, and often, revert to a principal-and-interest loan after an initial set period.
Refinancing basically refers to when you take out a new mortgage to repay an existing loan. The new borrowing can be with the same lender for your existing loan, or it can be with a different lender, depending on your needs and purpose to refinance. Reasons to refinance can include to cash out, to consolidate debt, or to obtain a lower interest rate.
Stamp duty is a State Government charge that relates to the transfer of property. The amount varies between the states.
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