Buying a home can be a tricky beast. You’ve got to secure financing, negotiate with real estate agents and hunt for your dream home. Not to mention mastering the new vocabulary you need to know if you’re to go toe-to-toe with the industry and come out on top.
As a first-home buyer, it may feel overwhelming. So, whether it’s LVR, rent-to-own or offset facilities you need to know about, we’ve got you covered in this comprehensive guide to the most important terms.
Key Terms
Auction:
An auction is one way of purchasing a property. An auction is at a scheduled time, and people bid on the property at once, either in person or online, rather than by privately submitting bids to the real estate agent.
Borrowing capacity:
Borrowing capacity is the maximum amount that a company or individual can borrow without financial hardship. It is most commonly calculated using your income and expenses.
Break cost:
A break cost is a fee that represents a lender's loss if you repay a fixed-rate loan early or switch loan products, interest rates or payment types in a fixed period. Not all lenders charge these, so it’s important to check the fine print.
Building insurance:
This is insurance that covers people who own a home or an investment property. Cover types can vary based on your level of cover, as well as the insurer you go with, so it always pays to read the product disclosure statement (PDS). Policies are generally designed to cover the home itself and its permanent fixtures from risks such as; natural disasters (fire, floods and storms) and also theft. You may also have the option to add on policies like contents insurance.
Building report:
A building report is a detailed property inspection conducted by a licensed and accredited property surveyor. A building report can uncover defects in a property before purchase. To access a report there is typically a $500 fee, which is often split into $50 upfront, and then $450 if you successfully purchase the home. You can also commission your own building and pest report.
Buyer’s agent:
A buyer’s agent is a qualified real estate professional who represents the buyer to help them find their dream home and secure the right property at the lowest price. This includes negotiating with the real estate agent and vendor on their behalf.
Buyers’ market:
A buyers’ market is a condition in the market where there is an increased level of supply and lower demand, driving prices down. Buyers’ markets are rare, and, in Australia in recent years, short-lived.
Capital growth:
Capital growth is the increase in your property’s value over time.
Community title:
A community title is a type of legal document that outlines, as part of a written agreement, who owns which part of a shared building. It specifically relates to properties with at least two lots that share a common area, such as a driveway or recreational land. It is often a substitute or alternative to a strata title.
Company title:
A type of land ownership through which a company owns the legal rights to land. Shareholders who have purchased shares in the company are entitled to exclusive occupation of a flat in a building on that land. Individuals don’t technically own the land, they own a share in the company that owns the land.
Comparison rate:
A comparison rate is a tool that is used to help you understand the true cost of a loan. In Australia, it is legally required to be listed alongside an advertised interest rate. Comparison rates are calculated using a standard formula that includes things like fees and charges as well as the interest rate relating to the loan.
Conditional approval:
When you apply for financing, your lender or broker will provide you with a letter outlining your conditional approval. That is the amount that you’ll likely be able to borrow following the verification of some of the preliminary information you have provided to your lender, plus a credit check. The letter will include a list of things you will need to provide to your lender to obtain unconditional approval, such as a contract of sale for the property Then your loan will be fully approved.
Conditional approval is what you will need in place to bid at an auction or put in an offer.
Contents insurance:
Following further from building insurance, which we know covers the building and its permanent fixtures. Contents insurance is insurance taken out for the belongings or items in your home. You can have contents insurance in your own home, investment property or property you rent. It is designed to cover your contents from events like storms, floods, fire or theft. Cover can differ depending on your insurer, so check your PDS. Typically, contents insurance covers things such as appliances and furniture.
Contract of sale:
A contract of sale is a legal document provided by the seller of a property (prepared by a solicitor) to the interested buyer. The agent will typically send out a contract of sale after an open for inspection, or when requested by a buyer.
Conveyancing:
Conveyancing is a standard part of the process of transferring property from one owner to the next. This is done by a licensed conveyancer or a lawyer. A conveyancer’s role is to check that outstanding bills—such as water rates, land rates and strata fees—are paid up in full by the existing owner, before you settle. They will also look into easements and any upcoming projects that may impact the home.
Cooling-off period:
During a cooling-off period, a buyer can withdraw from a property contract of sale without any legal repercussions even after signing. Cooling-off periods are only available for property sales by private treaty (not auction) and can vary between states and territories. A typical cooling-off period is 5 business days.
Credit report:
Your credit score is calculated using a variety of factors relating to your credit history, which are all summarised in your credit report. This can include previous borrowing defaults, loans and your repayment history. This is usually an important element of any financial product application. You can often find your credit score online for free without it leaving a mark on your credit history.
Depreciation:
Depreciation is the reduction in the value of your property over time. This can be due to factors such as wear and tear.
Down payment or deposit:
A home loan deposit is your upfront contribution to the purchase price of a property. Your deposit is kept in escrow (where an impartial third party holds the funds for safekeeping) until the property sale settles. For a traditional 80% LVR (loan-to-value ratio) mortgage, you are generally required to have a 20% deposit upfront.
Equity:
Equity is the difference between your property’s market value and the amount you still owe on your home loan. So, for example, if you have paid off 40% of your $1,000,000 home, you have $400,00 of equity.
First Home Owner Grant (FHOG):
This is a one-off government grant to help with the costs of buying your first home. Eligibility criteria apply based on state-by-state policies. It is typically $10,000 in NSW, through to $15,000 in QLD.
Fixed interest rate (fixed rate):
A fixed rate is an interest rate that is locked in and stays the same for a set period of time. If you have a home loan that is a fixed rate, your repayments won’t change for that period of time.
For sale (private treaty):
A private treaty is a sale process where the agreement for the sale is negotiated directly between the vendor and the purchaser or their agents (real estate agents/buyer’s agents).
Gazumped:
Gazumping occurs when an agent or seller accepts an offer you make on a property, but the property is sold to someone else, typically for a higher price or better terms.
Guarantor loan:
A guarantor is an immediate relative who has agreed to provide the equity in their property as additional security for you to purchase a home. As deposit requirements have increased dramatically in Australia over the last few years, many have been using guarantor loans.
Guide price:
In some states, real estate agents are able to provide a price guide. It's important to know as a buyer that this is used primarily as a sales tool for the real estate agent to lure in buyers. Often, real estate agents set the guide about 10%-20% below the target sales price in an effort to attract a wider pool of buyers and drive up the cost.
Home inspection:
Homes are open for inspection during the ‘campaign period’. A home inspection is an opportunity to view the home at a set time with the real estate agents and assess if the home is right for you. It’s important to check the property for livability, damage and to confirm that everything in the home works (check the water pressure, plug sockets and windows).
Honeymoon rate:
A typically desirable interest rate that is offered for a short promotional period at the start of a loan, credit card or savings account. Honeymoon rates are often followed by rates that are much higher. It’s important to check the overall terms you’re agreeing to and to do your own research.
Interest-only loans:
With interest-only loans, your mortgage repayments are fixed so that you only pay the interest portion of the loan for a set period of time. This often makes the loan repayments cheaper for a period but extends the life of your loan as you need to pay more of the principal later.
Interest rate:
An interest rate is a fee you're charged for borrowing money, typically a percentage of the total amount of the loan. Interest rates are often set based upon the RBA’s cash rate, plus a few % points. Interest makes up one portion of your mortgage payments.
Joint tenants:
Joint tenancy is a type of property ownership that allows individuals to have equal ownership and interest in the property - unlike tenants in common, which is defined below.
Lenders Mortgage Insurance (LMI):
LMI is often mistaken as another type of insurance policy for your home. But it is quite different as LMI is actually in place to protect your lender if you have trouble with your repayments. LMI is a payment that can be made upfront when you buy your home or, depending on the amount, it can also be added to your home loan.
LMI can be avoided if you save a deposit of at least 20% of your property’s value. LMI can add thousands of dollars to your upfront costs if you need to pay it.
Liabilities:
Liabilities refer to the other financial obligations a company may have that are payable to a different party. If you have loans, credit cards or ongoing payments, these will usually be included as your liabilities on a finance application
Loan amount:
A loan amount is the sum of the loan you are taking out with the bank. It is typically the purchase price, fees and potentially LMI, minus the deposit you pay.
Loan application:
A loan application is the process you move through with your lender or broker in order to apply for your loan. It is at this point your lender will assess your income and liabilities to see if you qualify and can afford a home.
Loan To Value Ratio (LVR):
LVR is the total percentage of the property’s value that you have borrowed. For example, if your home is worth $500,000 and you borrowed $400,000 your LVR is 80%.
Market value:
The market value of a home is the amount for which it can be sold for in the current market.
Mortgage broker:
A mortgage broker is someone who deals with banks or other lenders to arrange a home loan for their customers. A mortgage broker acts in your best interest when suggesting a loan for you and doesn’t just represent one bank or lender. Mortgage brokers are most commonly paid by the lender of your mortgage.
Negative gearing:
Negative gearing is when the income earned from a property is less than the expenses incurred running the investment. In Australia, the main benefit of negatively gearing an investment property is that any rental loss you incur may be able to be offset against other income you earn come tax time.
Offset facility:
A feature of a loan that helps you save on the interest you pay each month in addition to the principal on your loan. The balance in your offset facility or account directly offsets the amount you owe on your home loan. As an example, if your loan is $100,000 and you have $20,000 in your offset, then the interest is only calculated on the $80,000 difference. The rules and types of offset accounts will differ depending on your lender and type of loan.
Pest report:
A pest inspection is where a qualified pest inspector attends a property and conducts a methodical and careful visual examination of the inside and outside of a property, using thermal sensing and moisture detecting technology. A building and pest report is then put together which outlines the risks in the property’s condition. Common pests include termites and cockroaches.
Positive gearing:
Positive gearing is where the costs of the investment property are covered by the income it yields.
Pre-approval:
Also known as ‘approved in principle’, a pre-approval letter indicates the amount that a lender may be able to lend to you. This can give you a good idea of what your borrowing power may be before you start looking for homes. This is based on some preliminary information that you give your lender and will be later verified, so it pays to be honest.
Purchase price:
The purchase price or sale price is the amount of money you have agreed to pay for a property.
Real estate agent:
A real estate agent represents the seller in the sale process. It is their job to extract the best price and terms possible for their vendors and negotiate on their behalf, conduct open homes and run the sale campaign.
Redraw
A home loan feature that allows you to make extra repayments to your mortgage and still have the ability to take that money back out if you need it.
Refinance
The process of switching your loan to another bank or lender that better suits your needs. Refinancing can allow you to reduce your interest payments or switch to a fixed or variable contract. Refinancing is a similar application to your initial mortgage, they’ll consider your income and liabilities, credit limit, and home loan payments among other financial questions.
Rent-to-buy:
Rent-to-own (or rent-to-buy) is an alternative pathway to homeownership that allows home buyers to live in their dream home while they save for it. You can buy your dream home for a small upfront amount, move in and pay rent while contributing to a security deposit. When you’re ready to buy the property and move (refinance) to a mortgage, you can. Rent-to-own is an example of a low or no-deposit option, and is popular with families who aspire to be home owners, can pay for a mortgage, but who don’t yet have the savings for a 20% deposit.
Rentvesting:
Rentvesting term that describes the process of buying an investment property in a place you can afford and renting in the area you want to live in.
Repayment:
The weekly, fortnightly or monthly payment you will make towards your home loan.
Settlement (Period of time):
This is the legal process of transferring ownership of a property from the seller to the purchaser.
Split loan:
Some people opt to have a portion of their loan on a fixed-rate loan and another portion on a variable loan. This is called a split loan. It gives you the benefit of set payments on some of your loan, but the flexibility to pay off more of the loan on the variable portion.
Stamp duty:
Stamp duty is a tax that is charged by a state or territory government when a property is sold. Apart from your deposit, it is likely to be your largest upfront cost when you buy a property.
Strata:
A strata scheme is a system for handling the legal ownership of a portion of a building or structure. Strata also look after the common areas with your fellow tenants.
Tenants in common:
Tenants in common is a more flexible form of ownership on a property that allows two or more people to have a defined share of ownership in a home.
Title:
A property title is a legal document that outlines the ownership of a property. It can be acquired by a transfer of title or sale.
Valuation:
A valuation is a document that outlines the market value or value of the property at a point in time.
Variable interest rate:
A variable interest rate is an interest rate that fluctuates up and down over time. If you have a variable-rate loan, your repayments can change. As the reserve bank raises the cash rate, we see an increase in interest rates, meaning your variable repayment will likely increase.
66w Certificate:
A 66w certificate is important in New South Wales as it waives the cooling off period on a home, making the contract to purchase immediately binding.
