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The real cost of a repayment pause, and how to minimise the fallout
CBA’s announcement today that customers who take a six-month repayment pause will be refunded interest-on-interest charges during this time will help families struggling to make ends meet.
Fees charged if you exit your loan early; most often applied if you have a fixed interest rate
A loan that helps you “bridge” the gap between selling one property and buying another. A bridging loan can let you buy a second property while you’re still living in your first, though you risk owing more than you can comfortably afford to repay if your first property doesn’t sell.
The money you make (or lose) when you sell a property for more (or less) than you paid for it. If you’re an investor, you may need to pay tax on your capital gains – contact the ATO to learn more.
Adding the cost of your home loan’s upfront fees and charges to your mortgage, to be paid over the long term. While this means you won’t need to pay these fees upfront, the extra interest charges will likely cost you more in total.
Capped or Tunnel loans
A mortgage with limits on its variable interest rate. Capped loans limit how high the interest rate can rise, while Tunnel loans limit both how high and low a rate can go.
Combines a loan’s interest rate and its standard fees and charges into a single percentage figure. Used to help quickly compare the overall cost of different loans. Sometimes called the Average Annual Percentage Rate (AAPR) or Real Rate.
A loan used to build a new home, instead of buying an established home. Often lets you access only the money you need to pay for each construction phase (see Progressive Drawdown), which can help you manage your costs while the home is being built.
The legal process of transferring ownership of a property from one party to another. Legal fees on a property purchase are called conveyancing fees, and are paid to your conveyancer or solicitor.
Cooling off period
A length of time after exchanging contracts on a property, during which the buyer or seller can back out of the deal.
If you fail to make a mortgage repayment on time, and your lender can’t contact you to discuss your late payment, the lender may declare you to be in default of your mortgage. This means the lender can take legal action against you, including repossessing and selling your home. If your circumstances change, and you think you may end up in financial hardship, consider contacting your lender and/or a financial counsellor before you risk defaulting on your loan.
The money paid upfront towards buying a property. Often expressed as a percentage of the property’s value (e.g. 20 per cent), with the mortgage making up the rest of the purchase price.
An insurance policy that guarantees a buyer will pay the deposit on a property at settlement. Can help you buy property if you don’t yet have a cash deposit available, for example if you’re waiting for the sale of your old house to settle.
The value of a property that you own outright, which can be used as security when borrowing money. Your equity equals the current value of your property, minus what’s currently owing on your mortgage.
Putting more than the minimum required amount of money towards your home loan. This can help you pay off your mortgage faster, and allow you to pay less interest.
Fixed rate loan
A mortgage with interest rates that won’t rise or fall for a limited time, before reverting to a variable rate. During the fixed rate period, your repayments will stay the same, for simpler budgeting.
Someone who guarantees a home loan on behalf of a borrower, and agrees to take responsibility for the loan if the borrower defaults on their repayments. Most lenders require the guarantor to be a close relative of the borrower, such as a parent or grandparent, with a good credit rating and enough equity in their own property to cover part or all of the deposit.
What your lender charges for borrowing money. Effectively the “price” of “buying” a loan.
An option to add interest charges to your total loan balance for a limited time, rather than paying it as you go. Can help to minimise the cost of repayments, though increasing a loan’s size may mean it takes longer to pay off and costs more in the long term. Often seen on bridging loans and construction loans.
An option to pay only the interest charges on your home loan for a limited time. This can help lower the cost of your repayments for a limited time, but you won’t reduce the principal you owe. This means your mortgage may take longer to pay off and cost more in total interest.
Introductory or Honeymoon rate
A discounted interest rate that applies during a home loan’s initial introductory period (the “honeymoon”), before reverting to the higher standard rate. Can help to keep a home loan more affordable for a new borrower, though it’s important to watch out for the higher payments when the honeymoon period ends.
If you buy a property to make money, either from rental income or capital growth, you’re an investor, and your property is an investment. Investor mortgages may have different interest rates, fees, and approval criteria than home loans for owner occupiers.
Lenders Mortgage Insurance (LMI)
LMI safeguards the lender in case a borrower defaults on their mortgage. LMI is typically required for mortgages with an LVR higher than 80 per cent (AKA a deposit of less than 20 per cent), with the borrower required to pay the cost. The higher the LVR, the more the LMI may cost.
Line of credit
Allows you to borrow money by using the equity in your property as security. Often offers flexible withdrawals and repayments, with interest only being charged on what you borrow, similar to a credit card.
Loan to Value Ratio (LVR)
The size of your home loan compared to the value of your property. For example, if you paid a 20 per cent deposit on a property, and took out a mortgage for the remainder of its value, you’d have an LVR of 80 per cent.
Another name for a home loan. “Mortgaging” a property refers to using it as security or collateral for a loan.
Mortgage protection insurance
An insurance policy that can help cover your mortgage payments if you find yourself unable to pay for your home loan, such as due to injury or illness, or losing your job. Sometimes called Income Protection Insurance.
When you pay more interest on an investment property than you make in income from the property. This may effectively lower your taxable income – contact the ATO to learn more. The opposite of positive gearing.
A savings or transaction account linked to your home loan, which is included when calculating interest charges and may help you save money over time. For example, if you had a $300,000 home loan and a 100% offset account holding $20,000, you’d be charged interest as if you only owed $280,000 on your mortgage.
Fees that are charged periodically (e.g. monthly, quarterly or annually) over the life of the loan.
If you buy a property and live in the home, you’re an owner-occupier, and your property is owner-occupied.
A type of mortgage repayment holiday offered by some lenders when you become a parent and go on maternity/paternity leave. Putting you home loan repayments on hold can help you manage your living expenses during this time, though you may need to pay more interest in the long term.
An option to pick up your loan and take it with you when you move house. For example, you could sell your home and buy a new one of equal or lesser value, all without having to refinance.
When you make more money from rental income on an investment property than you pay in interest charges on the investment, your property is positively geared. The opposite of negative gearing.
When a lender agrees in principle to loan you’re the money you need to buy a property, on the condition that the lender confirms the details in your application.
Principal and interest loan
The most common home loan payment structure, where each repayment is made up of part of the money you owe (the principal) plus an extra charge from the lender (the interest), until the mortgage is completely paid off and you own the property outright. Sometimes called an Amortising Loan.
Used to access (“draw down”) small sums of money from a home loan in stages, rather than as one lump sum all at once. You’ll only be charged interest on the money you’ve drawn down, which can help manage your costs. Often used in Construction loans to pay for each stage of construction as a property is built.
Taking extra money you’ve previously paid onto your mortgage back out of the loan, and returning it to your bank account. A redraw facility allows you to save on mortgage interest by making extra repayments, while still having access to this money in case you need it. Redraw limits or fees may be involved.
Taking out a new loan to replace an old one. Refinancing may allow you to borrow more money (e.g. to buy another property or renovate your current one), enjoy more affordable interest rates and fees, or benefit from more useful features and benefits.
The option to take a temporary break from loan repayments when you experience proven hardship, such as unexpectedly losing your job or suffering serious injury.
Arranging with your employer to have part of your pre-tax income paid directly onto your home loan, bypassing your bank account. May offer tax benefits – contact the ATO to learn more.
An asset used to guarantee a loan. In most home loans, the security is the property itself, which can be repossessed and sold if you default on your loan.
The date when money is exchanged, and the ownership of a property changes hands, as defined in the contract of sale.
A home loan where interest is charged on part of your balance at a fixed rate, and on part of your balance at a variable rate, providing you with a mix of security and flexibility.
A state government tax on the sale and transfer of land and property. Cost may vary depending on the location and value of your property.
The costs involved when refinancing your home loan from one lender to another.
The agreed length of time for you to pay your mortgage. If you choose a shorter loan term, each repayment may cost you more, but you may pay less total interest than choosing a longer loan term. Sometimes called the amortisation period.
Fees charged at the start of your home loan to help cover the cost of processing your application. Includes establishment fees.
A professional assessment of a property’s value. Typically required by a lender before they can approve a home loan application.
Variable rate loan
A home loan where the lender may raise or lower your interest rate depending on a range of economic factors, including the national cash rate set by the Reserve Bank of Australia (RBA).