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Jargon busting your way into a home

Buying a home is a significant purchase. Let us break down the home buying jargon.

Buying a property is one of the most significant purchases you’ll ever make, and we’ve taken the time to break down all the home buying jargon for you.

Buying at auction vs private treaty
- There are a few key ways in which homes are sold, they include private treaty, public auction and silent auction.

The first option is a private treaty, this is where the seller sets a price, and buyers are free to negotiate until an agreed price is reached.

The second option is sale at auction, this is where interested buyers gather in public either onsite or at a specialist auction room to make individual bids on a property. The owner of the property usually sets a reserve price before the auction. This is the lowest price they are willing to accept. This price is kept secret from bidders. However, when you hear the auctioneer declare the property is ’on the market’ it usually means the reserve price has been reached.

Lastly, silent auctions are conducted in a private manner where bidders send their offers to the real estate agent. Similar to a public auction the highest bidder will win the property, this option is generally used to entice the highest offer being put forward from the beginning.

Auctions can be fast-paced, and stressful for buyers. Importantly, if you’re the highest bidder when the hammer falls, you are committed to buying the property. There is no cooling off period for homes sold at auction.
This makes it important to have a loan pre-approval in place – so you know your bidding limit, and can keep a clear head during the auction.

Bridging Finance – bridging finance is designed to cover the cash gap that occurs if you buy a new home before you’ve sold your current property. It’s only designed for the short term, usually up to 12 months. It gives you the option to buy a place you love while your current home is still on the market.

Certificate of Title – a certificate of title is the official written record of who owns a piece of land. There is a certificate of title for every property in Australia though land titles are managed by separate state/territory offices.

Comparison rates – a loan’s comparison rate takes into account the interest rate you’ll pay plus most (though not all) of the fees and charges relating to a loan. These fees can include the loan application fee, registration fees, plus any ongoing monthly fees. If it’s a fixed loan or an introductory rate, it’ll also take in to account the rate you’ll be on once the fixed or honeymoon period is over.

A Home Loan Key Facts Sheet can be referenced for each product to give you a good indication of the true cost of a loan, and allows borrowers to make an apples-for-apples comparison between different loans and lenders.

Contract of Sale – the contract of sale is an important legal document that spells out the details of any property you buy (or sell) including any fittings or fixtures such as curtains and appliances that may be sold along with the property.

The contract of sale can also include special conditions that may work in the seller’s favour, which is why it’s so important to have the contract reviewed by a solicitor or conveyancer before you sign on the dotted line.

Cooling off period – if you buy a home through private treaty (where you and the seller negotiate privately on price) you may be entitled to a cooling off period. This can let you back out of the purchase even after you’ve signed the Contract of Sale. There is no cooling off period if you buy at auction.

State/ territory Length of cooling off period Possible cost
NSW 5 business days 0.25% of the agreed purchase price 1
VIC 3 business days $100 or 0.2% of the purchase price, whichever is greater 2
QLD 5 business days 0.25% of the agreed purchase price 3
ACT 5 business days 0.25% of the agreed purchase price 4
SA 2 business days $100 5
TAS No cooling-off period applies to any sale of property in Tasmania 6 N/A
WA No cooling-off period applies in WA unless the buyer and seller have both agreed to add this to the Contract of Sale 7 N/A
NT 4 business days 8 N/A

Equity – simply means, the value of what you currently own on your home. As a guide, if your home is worth $600,000 and there’s $400,000 remaining on your home loan, you have home equity of $200,000.

However, if you’re planning to borrow against this equity, keep in mind that most banks will only allow you to borrow against the available equity that is less than 80% LVR. 

Genuine savings means savings you have built up over time, usually over a 3 month period and not a lump sum that has been gifted. This helps the lender determine you have the discipline to meet your home loan repayments.

Guarantor Loans - Is when a guarantor, usually a family member, agrees to back all or part of the home buyer’s application with the equity in their home. This is a way for home buyers to get into the market without a 20% deposit, without paying lenders’ mortgage insurance.

LMI – lenders’ mortgage insurance (LMI) is a type of insurance that applies if you buy a home with less than a 20% deposit. This insurance that is paid by you protects the lender against financial loss in the event that you are unable to afford to meet the home loan repayments.

It involves a one-off premium paid at the start of your loan, and your lender will organise insurance cover on your behalf. Home buyers don’t have to shop around for LMI.

The catch is that LMI can be expensive, potentially costing several thousand dollars. However, some lenders will let you add the LMI premium to the loan so that it can be paid off over time.

The upside of LMI is that it can allow buyers to get into the market sooner, potentially beating future price rises.

LVR – if you’re in the market for a home loan, chances are you’ll come across the term ‘LVR’.

It measures the ‘loan to valuation ratio’ – in other words, how much of your home’s value you are taking a loan out for. If you buy a home worth $500,000 with a deposit of $100,000, you are borrowing 80% of the home’s value, so the LVR is 80%.
The LVR matters because lenders have limits on the maximum LVR they will accept – often 90%, meaning you need at least a 10% deposit. Having a lower LVR can also mean paying a lower interest rate.

Offset Accounts – depending on your bank, offset accounts are generally transactional or savings accounts linked to your home loan where you can park your savings. The account itself earns no interest. Instead the balance of the offset account is deducted from (or ‘offset’ against) the value of your home loan when monthly interest is calculated.

For example, if you have an offset account with a balance of $50,000 and a $400,000 home loan, interest will be based on a loan value of $350,000. This calculation only applies if your offset account offsets 100% of your loan. 

Your monthly repayment won’t change, but by lowering the interest cost, more of your money goes towards paying down the loan balance. In this way, an offset account can help you put spare cash to work paying off your home loan sooner.

Off the Plan – off the plan purchases occur when you agree to buy a property that is not yet built.
You may only need to pay a small deposit to secure a property. This can give you extra time to save more money towards the cost of your home when construction is completed.

The risk is that you are committing to a property without seeing it fully completed, and a lot can happen between agreeing to buy off the plan, and the date when construction is finished.

Owner Occupied vs Investment – when you buy a home to live in, you are said to be an owner occupier. If you buy a property to rent out to tenants, you are an investor.

The distinction is important as interest rates can vary between owner occupier home loans and loans for property investors. Check out our loan repayments calculator to explore different owner occupier and investor rates.

Pre-approval – Where your bank/lender approves you (in principle) to borrow an agreed some of money subject to further financial checks.

It’s a smart idea to have pre-approval because you know how much you will be able to offer a vendor to purchase a property.

Your home loan won’t be fully approved however, until you select a property to buy as the lender will likely want to have the place valued to be confident you are paying a fair price.

Settlement – settlement is the final stage of the home buying journey and simply put, it is a legal and financial process, once completed enables the transfer of ownership between the buyer and the seller – an exciting milestone!

On settlement day, your solicitor/ conveyancer together with your lender meets with your sellers representatives and will organise for the balance of the purchase price to be paid to the seller. By this point, your solicitor will have arranged for your name to appear on the property’s Certificate of Title, your loan will be in place, and you will be invited to make a final inspection of the property to be sure all is well.

If everything stacks up, you’ll be given the keys to your new home – and all you have to do is settle in!

Stamp Duty – stamp duty, also known as transfer duty, is a state-based tax that applies when you buy property in Australia.

How much you pay depends on the state/territory the property is located in. But stamp duty is worked out as a percentage of your home’s value. On the plus side, a number of states offer big savings on stamp duty for eligible first home buyers. See our stamp duty calculator to determine what this could mean for you.

Valuation – the value of any property you buy is important to lenders. That’s because the property acts as security for your home loan.

To be confident you are paying close to market value, a lender will likely conduct a market valuation of your property. In some cases, lenders will use a ‘desktop valuation’, which looks at home values in your area compared to the price you have agreed to pay.

For other properties – such as acreage or truly unique homes, the lender may arrange for a professional valuer to inspect the property in person.

Vendor – the vendor (or seller) is the owner of a property listed for sale.

Variable vs. Fixed – home loan interest rates can be either fixed or variable.

A fixed rate is locked in for whatever term you choose – usually between one and five years (3 years is the maximum term at Community First). During this time, the rate, and your loan repayments, will stay the same no matter what happens to market interest rates. This makes a fixed rate useful for budgeting the cost of a home loan.

By contrast, variable rates will rise and fall in line with market interest rates. This can also see your home loan repayments increase or decrease depending on how rates are moving. The appeal of variable rate home loans is that they tend to be more flexible than fixed rate loans.

If you’re not sure which way to go – fixed or variable, many lenders let you split your loan so that part of it has a fixed rate while the remainder has a variable rate. Try out our loan comparison calculator here

Principal and interest (P&I) vs interest only (IO) – the repayments made on a home loan can be either principal and interest, or interest only. The principal means the amount you borrowed.

Most home owners choose principal and interest payments. This is where each repayment is made up of interest plus a small portion of the loan balance (or principal). In this way, the loan is steadily paid off over time.

Interest-only payments will be lower because they are only comprised of interest charges. You do not repay any of the loan balance at all and you are generally only allowed to do this for a maximum of 5 years however this may vary from lender to lender. Some investors use interest only loans as part of their investment strategy as they plan to sell the home when the value has gone up and take advantage of the capital gains to pay back the loan while pocketing some profit along the way. This is why interest-only loans are best suited to investors. The property may need to be sold to pay off the loan, which is not what most home owners have in mind!

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The information contained in this article is only correct at the point of time of publication. It is general information and has been prepared without taking into account your personal circumstances, objectives or needs. Please consider if this information is right for you before making a decision to acquire any product.

6 Consumer, Building & Occupational Services Tasmania

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