The Guide - Finance

Translating some confusing finance language

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Principal. Offset account. Equity. Settlement. What do they all mean? Well, the good news is that most of this is not rocket science and you can get your head around it all when you try. And when you do know the basics, you’ll be rewarded with a great feeling of control and confidence as you roll along the path to your new home.

There are not many worse feelings than sitting with a financial person while they talk about your life savings and the biggest investment you’ve ever made, and you barely understand a word. It happens all the time and the only solution is to arm yourself with some basic knowledge.

- newhomesguide.com.au

Settlement

Settlement is a big day, and a great day for you. This happens after you have made your offer and you get final approval from your lender. Settlement is when the lender makes the final payment and the property officially becomes yours.

Equity

Equity is the amount of money that is yours and is calculated when the home loan amount is subtracted from the dollar value of the home. So, if your new home is worth $750,000 and you owe $400,000 on your loan, your equity will be $350,000.

Conditional approval

You’ll be granted conditional pre-approval when the lender has assessed your application and confirmed that you meet their lending criteria. With this approval, you can go and make an offer on a property up to the specified amount.

Formal approval

This occurs when the lender removes ‘conditional’ from your approval, and the approval of your home loan then becomes official. This usually happens after you have made an offer and the bank has valued the property.

Line of credit facility

This is very much like an overdraft facility and is essentially a revolving line of credit that can be withdrawn from, up to an agreed amount, whenever you like.

Loan to value ratio (LVR)

In simple terms, the LVR refers to the percentage of the property’s value you need to borrow in order to buy the home. Lenders look at this when assessing you for your home loan. e.g. if the home is valued at $500,000 and your deposit is $50,000 you’ll be borrowing $450,000. That’s 90% of the home’s value and so your LVR is 90%.

Offset account

This is an alternative to making extra repayments. You can put your cash in an offset account and the balance in the offset account is offset daily against the home loan and your repayments are reduced accordingly.

Portability

This is handy if you think you might be moving home and don’t want to take out a new loan. When you move house, you can take your existing home loan with you across to the new property.

Principal

The principal is the total amount you borrow. Your repayments are made up of both principal and interest amounts. So loan repayments are often spoken about as ‘principal and interest’ or ‘principal only’ etc.

Redraw facility

This is a common and handy feature that allows you to withdraw any excess payments that you have made against your loan. This is usually only available on variable rate loans.

Refinance

This simply means switching from one lender to another, usually to get a better rate. It can be done and is a common practice, but might not be completely simple as there are usually fees involved.

Repayment holiday

25 - 30 years is a long time to be making repayments, and we all love taking a break. A repayment holiday is exactly that, with this feature you’ll be allowed to take a break for an agreed amount of time.