Mortgage Mumbo Jumbo decoded: Making Sense Of Banking Terminology
Buying your first home is an exciting milestone, but it’s often also overwhelming and more than a little confusing when you dive into your home loan options.
The mortgage world has its own language and you’ll be confronted by a whole host of bizarre terminology throughout your journey. There are acronyms like LVR and LMI, terms like redraws and comparison rates, and terms and conditions that might look a little vague.
Interest rates are starting to move again, which means a lot of people are weighing up whether now’s the right time to buy. And if you’re new to the world of home loans, you’re probably realising just how complicated it all seems at first glance.
That’s why having a mortgage broker on your side makes a massive difference. A good broker understands the bank jargon, knows what to look for and can explain things in plain English. They’ll help you compare your options properly so you’re not just looking at interest rates, but the full picture of what a loan will actually cost you, and whether it suits your life now and in the future.
To help you get a head start, we’ve pulled together a no-nonsense glossary of the most common banking terms you’ll come across on your home loan journey. Let’s cut through the fluff and get straight to what matters.
LVR
What it means: LVR, or loan-to-value ratio, is a way of measuring how much you’re borrowing compared to how much the property is worth. It’s shown as a percentage.
How to calculate it:
Loan amount divided by property value equals LVR percentage
Example: If you’re buying a home worth $600,000 and borrowing $480,000, your LVR is 80 per cent.
Why it matters: Most lenders prefer loans with an LVR of 80 per cent or lower. Once you go above that, you might have to pay LMI (more on that next) and your interest rate could be higher.
LMI
What it means: Lenders mortgage insurance is a premium you pay if your deposit is less than 20 per cent of the property’s value. It protects the lender – not you – if you can’t repay your loan.
Why it matters: LMI is often thousands of dollars added to your loan amount, meaning you’ll pay interest on it too. It’s a hidden cost many buyers don’t expect, so it’s worth factoring into your budget early on.
Variable Rate
What it means: An interest rate that can go up or down depending on market conditions, like decisions made by the Reserve Bank of Australia.
Why it matters: Your repayments could increase or decrease over time. Variable rates usually offer more flexibility, like letting you make extra repayments, but come with less certainty.
Other names: Flexible rate.
Fixed Rate
What it means: An interest rate that stays the same for a set period, usually between one and five years.
Why it matters: Your repayments stay the same during the fixed term, which can be great for budgeting. But fixed loans are often less flexible. Extra repayments may be limited and breaking the loan early can come with hefty fees.
Other names: Locked rate, set rate.
Comparison Rate
What it means: A more realistic look at the cost of a loan. It includes the interest rate plus most of the upfront and ongoing fees.
Why it matters: That flashy low interest rate in the ad? It might come with high fees that make the loan more expensive overall. The comparison rate helps you see past the marketing and compare loans properly.
Life-of-loan discount
What it means: A discount off the standard variable rate that applies for the entire life of your loan.
Why it matters: It’s not a honeymoon rate – this discount sticks around. But not all lenders offer it, and some only apply it if you sign up to a home loan package, which might come with an annual fee.
Other names: Ongoing discount, long-term rate reduction.
Credit Criteria
What it means: Every lender has rules about who they’ll lend to. These include minimum incomes, employment history, credit scores and more.
Why it matters: Just because you get approved by one lender doesn’t mean you’ll get approved by another. A broker can help you understand which lenders are likely to say yes based on your situation.
Other names: Lending requirements, borrowing conditions.
T&Cs
What it means: Terms and conditions are the fine print that comes with any product or rate. For example, a special rate might only apply if you’re an owner-occupier, not an investor.
Why it matters: That great-sounding deal might not actually apply to you, or might come with conditions that make it less attractive in the long run. Always read the T&Cs, or better yet, ask your broker to explain them.
Total loan term
What it means: This is the length of time you’ll be repaying your loan, which is often 25 or 30 years.
Why it matters: A longer loan term means lower repayments each month, but you’ll pay more interest overall. A shorter-term loan costs more upfront but can save you big in the long run.
Other names: Loan duration, loan length.
Repayment Frequency
What it means: How often you make your loan repayments – weekly, fortnightly or monthly.
Why it matters: Paying weekly or fortnightly instead of monthly can shave years off your loan. Interest is calculated daily, so more frequent payments can reduce the overall interest charged.
Other names: Payment frequency.
Repayment types
Principal and interest (P&I): You’re paying down the loan amount and interest, which reduces your debt over time.
Interest only (IO): You only pay the interest for a set period, usually up to five years. Your actual debt doesn’t reduce during this time.
Why it matters: Interest-only loans can help with cash flow in the short term but they cost more over time. They’re often used by investors, not owner-occupiers.
Redraw facility
What it means: If you make extra repayments on your loan, a redraw facility lets you access that money later if needed.
Example: Let’s say your minimum repayment is $2000 per month, but you pay $2500. That extra $500 builds up over time, and you might be able to withdraw it later.
Why it matters: It gives you flexibility without losing the benefit of making extra repayments. Just keep in mind that some loans limit how much and how often you can redraw.
Other names: Loan access feature, extra funds withdrawal.
Extra or additional Repayments
What it means: Voluntarily paying more than the minimum required each month.
Why it matters: This is one of the easiest ways to reduce your loan term and save on interest. Even small extra payments can make a big difference over time.
Fees or additional fees
What it means: These are the extra costs that come with the loan, such as application fees, monthly service fees, package fees, exit fees and so on.
Why it matters: Always factor in these costs when comparing loans. A loan with a slightly higher interest rate but fewer fees might work out cheaper overall.
Other names: Loan costs, bank charges.
Knowledge is power
Buying your first home is meant to feel exciting, not intimidating. That’s why working with a mortgage broker is such a game-changer.
We speak the language of lenders and can take on board the task of navigating the confusing terminology, avoiding unnecessary costs, finding a loan that suits your personal circumstances now and into the future, dodging any potential pitfalls, and getting the best possible deal.
There’s no such thing as a silly question. We’re here to make the process as quick and painless as possible.
Want to make your first home dreams a reality? Let’s talk about what’s possible and how we can replace uncertainty with excitement.
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