Ultimate 60 Terms To Know When Buying Your First Home
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.
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.
A 66w certificate waives the cooling off period on a home, making the contract to purchase immediately binding.
One of the legal processes of transferring ownership of a property from seller to buyer. It is the process of going to an auction setting, either in person or online, whereby people bid on the day, rather than by privately submitting bids to the real estate agent.
Is the maximum amount that a company or individual can borrow without financial hardship. It is most commonly calculated using your income and expenses.
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.
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.
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 a 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 report.
A qualified real estate professional who represents the buyer to help them secure the right property at the lowest price. This includes negotiating with the real estate agent and vendor on their behalf. Check out our extensive guide on how to negotiate purchase price with an agent.
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.
This is the term used to describe the increase in your property’s value over time.
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.
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 who owns the land.
A comparison rate is a tool that is used to help you understand the true cost of a loan. It is calculated using a standard formula that includes things like fees and charges as well as the interest rate relating to the loan.
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, this is when your loan will be fully approved.
A conditional approval is what you will need in place to attend an auction.
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
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.
This is a standard part in 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.
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.
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 borrow defaults, loans and repayment history. This is usually an important element of any finance application. You can often find your credit score online for free, without it leaving a mark on your credit history.
This is the reduction in the value of your property over time, due to factors such as wear and tear.
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 safe keeping) until the property sale settles. With a traditional 80 LVR mortgage, you require about 20% deposit upfront. With a rent-to-own service such as OwnHome, that’s closer to 3%.
This 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 time. Eligibility criteria applies, based on state by state policies. It typically accounts for $10,000 in NSW, through to $15,000 in QLD.
Fixed Interest Rate (Fixed Rate)
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)
The sale process where the agreement for the sale is negotiated directly between the vendor and the purchaser or their agents (real estate agents/buyers agents).
Gazumping occurs when an agent or seller accepts an offer you make to buy a property at an agreed price, but the property is sold to someone else, typically for a higher price or better terms.
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. Rent-to-buy programs, that don’t require a family guarantor, are increasingly popular.
Homes are open for inspection during the ‘campaign period’. These are opportunities where you get to view the home at a set time with the real estate agents to 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 just-so (check the water pressure, plug sockets and windows).
A typically desirable interest rate offered for a short time 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
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.
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 tenancy is a type of property ownership that allows for individuals to have equal ownership and interest in the property. Unlike tenants in common that 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 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
This 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.
The forms and 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)
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%.
The market value of a home is the amount in which it can be sold for in a current market.
A mortgage broker is someone who deals with banks or other lenders to arrange a home loan for their customer. 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 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.
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.
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 report is then put together which outlines the risks in the property’s condition. Common pests include termites and cockroaches.
Positive gearing is where the costs of the investment property are covered by the income it yields.
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.
At OwnHome, we call this your Home Shopping Budget - so you can understand how much money you potentially have to work with when house hunting. <Link to BP calc>
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.
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.
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-own (or rent-to-buy) is a new pathway to homeownership that allows home buyers to live in their dream home while they save for it. Rent to buy is a major plank of housing access policy in Singapore, the USA and the UK. You would buy your dream home for as little as 3% upfront, 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. With OwnHome, you can buy almost any home in NSW and QLD, make renovations, and move to a mortgage with any lender after two years at the pre-agreed purchase price. 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, and who don’t yet have the savings for a 20% deposit.
A term which describes the process of buying an investment property in a place you can afford and renting in the area you want to live in.
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 seller to the purchaser.
This is a term most commonly used with rent-to-own agreements. It refers to the savings portion of payments, and comes off the purchase price when you move from a rent-to-own provider to a lender. An example of this is if the agreed purchase price is $1,000,000 and you had contributed $200,000 to your Security Deposit, the amount of money you’d require from a mortgage is $800,000.
Some people opt to have a portion of their loan on a fixed rate loan and another portion on a variable loan. This gives someone the benefit of set payments on some of their loan, but the flexibility to pay off more of their loan on the variable portion.
A tax that is charged by a state or territory government when a property is sold. It is likely to be your largest upfront cost when you buy a property, apart from your deposit.
A strata scheme is a system for handling the legal ownership of a portion of a building or structure. Strata also looks after the common areas with your fellow tenants.
Tenants In Common
Tenants in common is a more flexible form of ownership on a property which allows two or more people to have a defined share of ownership in a home.
A property title is a legal document which outlines the ownership of a property. It can be acquired by a transfer of title or sale.
A valuation is a document that outlines the market value or value of the property at a point in time.
Variable Interest Rate
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.
The amount of seconds you have dreamed about your new home, that we hope you’ll soon get to enjoy!
It is an exciting journey exploring your path to home ownership! We hope these terms have helped you understand a little more about the terms you will hear as you start to look at purchasing a home. If you’re looking to navigate the buying process check out our ultimate guide to bidding and negotiation. Or, if you’re looking to discover some additional options for how to get into your own home, check out some of our articles on rent-to-own vs a traditional mortgage or rent-to-own vs paying LMI.
If you want to know more about your personal circumstances, Discover Your Buying Power With OwnHome.