The world of mortgages is unfamiliar territory for many people, and has enough jargon to fill volumes. The technical language can be overwhelming, but fear not! Understanding mortgage jargon is not only achievable, but essential for making informed decisions about one of life’s most significant financial commitments … buying a home.
In the first half of this chapter, I share a comprehensive list of the most commonly used mortgage terms and their definitions, serving as your reliable guide to navigate these complexities with more confidence and clarity. Then, in the second half of the chapter, I highlight some of the advantages of engaging a mortgage broker.
Glossary of terms
Let’s dive in and explore the language of mortgages together, ensuring you’re well-equipped to navigate your path towards home ownership…
Mortgage: A legal agreement by which a bank/lender/creditor lends money at interest in exchange for taking the title of the debtor’s property.
Principal: The initial amount of money borrowed, excluding interest. Your mortgage principal is the amount you borrow from a lender to buy your home. If a bank lends you $250,000, your mortgage principal is $250,000. You’ll pay this amount off in monthly instalments for a predetermined length of time (loan term).
Principal and interest (P&I) loan: A home loan consisting of two components: principal and interest. Principal is the loan amount you have borrowed from the bank or lender, and interest is the cost charged by the bank for borrowing that principal.
Interest-only (IO) loan: A mortgage repayment option where only the interest (and not the principal) is paid for a specified period.
Interest rate: The percentage of the loan amount charged by the lender for the use of their money.
Loan term: The period over which a loan is to be repaid, typically expressed in years. The most common loan period is 30 years.
Loan repayment: The monthly instalment paid by the borrower to the lender to repay the loan.
Owner-occupied (OO) home loan: A type of loan associated with a property intended as a personal residence.
Investment (INV) loan: A type of loan linked to a property intended for purposes other than as a personal residence.Loan-to-value ratio (LVR): The ratio of the loan amount to the appraised value of the property. For example, if your loan amount is $500,000 and your property value is $1,000,000, then your LVR is 50%.
Fixed-rate mortgage: A mortgage with an interest rate that is fixed or stable for the entire term of the loan, typically for a period of one to five years.
Variable-rate mortgage: A mortgage with an interest rate that can change periodically.
Split loan: A mortgage that is divided into two or more portions, each with different interest rates or loan types. For example, a percentage of the loan on a fixed rate and a percentage of the loan on a variable rate.
Comparison rate: An interest rate figure that includes both the interest rate and most fees and charges relating to a loan.
Revert rate: The variable rate your loan reverts to once the fixed-rate period has expired.
Lenders mortgage insurance (LMI): Insurance paid by the borrower that protects the lender in case the borrower defaults on the loan, typically required for loans with a high loan-to-value ratio (LVR)—above 80%.
Equity: The difference between the market value of a property and the amount owed on the mortgage.
Offset account: A savings or transaction account linked to a mortgage, where the balance offsets the interest payable on the loan, reducing the amount of interest you pay over the life of the loan.
Redraw facility: A feature of a loan account that allows borrowers to withdraw extra payments made on their mortgage. Works similarly to an offset account where the balance offsets the interest payable on the loan, which reduces the amount of interest you pay over the life of the loan.
Stamp duty: A state government tax on property transactions. This varies between states.
Conveyancing: The legal process of transferring property ownership from seller to buyer.
Mortgage broker: A financial intermediary (in other words, a “go between”) who works with customers to find a mortgage solution with their best interests at heart. A mortgage broker must operate under BID (see the next definition).
Best interest duty (BID): A statutory obligation for mortgage brokers to act in the best interests of consumers (best interests duty), and to prioritise consumers’ interests when providing credit assistance (conflict priority rule).
Break costs: Charges incurred when a borrower pays off a fixed-rate mortgage before the end of the agreed term.
Exit fees: Charges incurred when a borrower pays off a mortgage, particularly if it is paid off before a specified period.
Default: Failure to meet the terms of a loan agreement, often resulting in penalties.
Title deed: A legal document proving ownership of a property.
Home loan application/settlement fee: A fee charged by the lender to cover the cost of processing a mortgage application.
Australian Government Home Guarantee Scheme (HGS): An Australian Government initiative to support eligible home buyers to buy a home sooner. The scheme includes three types of guarantees:
- First Home Guarantee (FHG): Supporting eligible first home buyers to buy a home sooner.
- Regional First Home Buyer Guarantee (RFHBG): Supporting eligible regional first home buyers to buy a home sooner, in a regional area.
- Family Home Guarantee (FHG): Supporting eligible single parents or eligible single legal guardians of at least one dependent to buy a home sooner.
Bridging loan: A short-term loan that helps borrowers finance the purchase of a new property while waiting to sell their existing one.
Construction loan: A type of loan that provides funds for the construction of a new property or significant renovations.
Deposit: The upfront amount paid by a borrower towards the purchase price of a property.
Servicing guarantor: A person who agrees to take responsibility for the mortgage repayments if the borrower defaults.
Security guarantor: A family member with sufficient equity in their home can use it as a security guarantee for the borrower’s loan.
Home loan package: A bundled offer that includes a mortgage loan along with additional banking products and services.
Mortgagee: The lender or financial institution that provides the mortgage loan.
Mortgagor: The borrower who pledges their property as security for the mortgage loan.
Refinance: The process of switching from one mortgage lender to another or changing the terms of an existing mortgage.
Valuation: The assessment of a property’s value by a qualified valuer.
Aggregator: An aggregator acts as an intermediary between lenders and mortgage and finance brokers, and holds an Australian credit licence (ACL) with the Australian Securities and Investments Commission (ASIC). As an Australian credit licensee, an aggregator may appoint credit representatives (mortgage and finance brokers) who use their Australian credit licence to provide credit assistance.
Property settlement: Completion of the purchase of a property, when it officially becomes yours.
Conditional approval/pre-approval: This means that your mortgage underwriter is mostly satisfied with your mortgage application. They are willing to approve your mortgage as long as you can meet their pending conditions.
Unconditional/formal approval: The lender’s final decision to approve you for the loan. It means they have taken all your details into account and are happy to lend you a set amount of money to buy a specific property.
Debt consolidation: A mortgage refinancing option where you consolidate all your existing debts into one loan.
Cash-out refinance: A mortgage refinancing option that lets you convert home equity into cash.
For a broader perspective, you may also want to explore common mortgage terms explained by Britannica.
As you familiarise yourself with the essential mortgage terms outlined here, you’re taking a significant step towards building financial confidence. Remember, knowledge is power. By understanding the language of mortgages, you’ll be better equipped to make informed decisions that align with your financial goals and aspirations.
But don’t stop here. Continue to engage with the material, ask questions, and seek guidance when needed.
Building a strong foundation of mortgage literacy sets the stage for a confident and empowered journey into home ownership.
So, pat yourself on the back for the progress you’ve made, and stay committed to your financial journey. The road ahead may have its twists and turns, but with the right knowledge in hand, you’re well-prepared to navigate it with confidence.
Your Financial Ally (aka your wingwoman)
I liken the role of a mortgage broker, or financial ally, to that of a wingman or wingwoman—let’s combine this: wing(wo)man. The concept of a wing(wo)man may not be officially recognised in the dictionary, but its essence resonates deeply in both aviation and everyday life. Traditionally, a wingman in aviation serves as a form of protective support, flying just outside and behind the right wing of the leading aircraft in a flight formation. In slang terminology, a wingman is someone who helps, protects or guides a friend or associate through various situations.
In the context of mortgage brokers, the role remains the same: to offer invaluable support and guidance, especially in significant endeavours such as buying a property or refinancing. Purchasing a home isn’t a decision made overnight; it’s a process that involves careful planning and consideration. This process can be daunting and is influenced by factors such as individual experience, knowledge, confidence levels, and financial situation. For some, the idea of buying a house may remain just that—an idea—due to uncertainty or lack of direction. Yet, it’s precisely in these moments that having a wing(wo)man by your side can make all the difference.
Think of your wing(wo)man as your adviser, your confidant, your partner in navigating the complexities of financing a property. From the outset, they can assist you in formulating a game plan, providing clarity on the steps involved, and bolstering your confidence every step of the way.
3 Key Roles of Your Mortgage Broker
The right mortgage broker can completely transform the way you navigate the world of mortgages. Think of your mortgage broker as your:
Personal home loan shopper
Mortgage brokers have access to many different lenders, so we can do the legwork for you. In addition to understanding different lender policies and niches, our established relationships with lenders allow us to potentially negotiate more favourable terms on your behalf.
As outlined in the previous section, we must operate under best interest duty (BID) to ensure our recommendations are within your best interests—something a lender does not need to abide by. It is also an opportunity to find a lender with products that fit your needs, rather than being forced to fit within the product policy of one particular lender that you have liaised directly with. That’s like going to a shopping centre to buy an outfit for a special occasion but only going to one shop! In contrast,
In other words, they create a personalised solution that’s right for you.
Professional Admin Assistant
A mortgage broker will manage the collection of information from you, organise it all, go through the relevant checks and balances to ensure a strong application, prepare and submit the loan application on your behalf, and follow the application right through to settlement. Job done!
Ongoing Loan Adviser
Your relationship with a mortgage broker doesn’t end once settlement occurs. A mortgage broker can act as a loan adviser for the life of your loan, providing ongoing support and guidance. They can periodically review your loan to ensure it remains competitive, and present refinance options if it is not. And the best part is that the lender will pay the mortgage broker’s commission—you don’t need to pay for this service!
An Essential Checklist
Taking on a mortgage is a huge commitment, so it’s important that you trust your mortgage broker. Before you choose one to work with, I recommend you check the following:
- Their credit representative number. Once you have this number, you can look them up on the ASIC website (www.asic.gov.au) to confirm they are who they say they are. My credit representative number is 540557.
- Their qualifications. Ask for a copy of their Certificate IV in Mortgage Broking and Finance, which is the minimum requirement they must have. As an FYI, I also have my Diploma of Finance and Mortgage Broking Management.
- Ensure they’re registered with an ASIC-approved dispute resolution scheme, such as the Australian Financial Complaints Authority (AFCA). I belong to AFCA and my membership number is 104841.
- Ensure they are registered with an ASIC-approved industry association, such as the Mortgage & Finance Association of Australia (MFAA) or the Finance Brokers Association of Australia (FBAA). I belong to the MFAA and my membership number is 602414.
In my experience as a mortgage broker, I often find myself working closely with my customers long before they embark on the journey of purchasing a home. I take them through my signature process of building financial confidence, which I outlined in the previous chapter. I prioritise education, helping my customers gain a deeper understanding of their financial situation and goals to ultimately boost their financial confidence. Together, we develop a tailored plan to bridge the gap between their current circumstances and their desired outcome, all while challenging outdated notions about finances that may be holding them back.
It’s a reminder that seeking support is not a sign of weakness, but a demonstration of strength—a recognition that together, we can achieve more than we ever could alone.
So, if you find yourself hesitating to take that first step towards home ownership, remember that you don’t have to navigate this path solo.
Reach out, find your wing(wo)man, and embark on this journey with confidence, knowing that you have an ally by your side every step of the way.
In the next chapter, I reveal the steps involved in purchasing a property, as well as the steps required to refinance an existing mortgage.
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