Applying for a mortgage is a major financial decision – and with it comes a flood of unfamiliar terms and acronyms. Whether you’re a first-time buyer or refinancing your current home loan, navigating the terminology can feel overwhelming. The good news? It doesn’t have to be.
In this guide, we’ll break down the most commonly used mortgage terms in Australia so you can feel informed and confident every step of the way.
Amortisation
Amortisation refers to the gradual repayment of a loan over time through scheduled instalments. Each repayment consists of two components:
- Principal – the amount you’ve borrowed
- Interest – the cost charged by your lender for borrowing
At the beginning of your loan, most of your repayment goes toward interest. As time passes, more goes toward reducing your loan balance. Your lender can provide an amortisation schedule, which shows how each repayment is split between interest and principal over the life of the loan.
Escrow
In the Australian context, an escrow account isn’t commonly used in the same way as it is in the US. However, some lenders may require funds to be held in trust (a similar concept) for expenses like:
- Property taxes
- Home insurance
- Strata levies
If your loan includes this feature, your lender will collect a portion of these costs with each mortgage repayment and pay them on your behalf when they’re due.
Principal
The principal is the original loan amount borrowed from your lender. When you make a mortgage repayment, a portion goes towards reducing your principal balance. Over time, as the principal decreases, your interest charges also reduce – helping you build equity in your home.
Interest Rate
Your interest rate is the annual percentage charged by your lender on the remaining loan balance. It’s a key factor in determining your monthly repayments and the total amount you’ll repay over the life of your loan.
Interest rates are influenced by:
- Your credit history
- The size of your deposit
- The loan term and type
- Broader economic factors, such as the Reserve Bank of Australia’s cash rate
Even a small change in your interest rate can significantly affect your repayments, so it pays to compare offers.
Fixed vs. Variable Interest Rates
When selecting a home loan, you’ll need to choose between a fixed, variable, or split rate loan.
Fixed-Rate Loans
- Lock in your interest rate for a set period (typically 1–5 years)
- Provide certainty around repayments
- May have limitations on extra repayments or redraws
Variable-Rate Loans
- Interest rate moves with market conditions
- Flexible features like redraw and offset accounts
- Your repayments can increase or decrease over time
Split Loans
A split loan lets you fix part of your loan and keep the rest variable, offering a mix of stability and flexibility.
Closing Costs
Closing costs refer to the expenses associated with finalising your home purchase. These costs vary by state or territory but generally include:
- Stamp duty
- Loan establishment fees
- Conveyancing or solicitor fees
- Lenders mortgage insurance (if applicable)
- Property inspection and valuation fees
Typically, closing costs range from 3% to 5% of the property price, so it’s crucial to factor them into your budget early.
Private Mortgage Insurance (PMI) – AKA Lenders Mortgage Insurance (LMI)
In Australia, Lenders Mortgage Insurance (LMI) is the equivalent of what’s called PMI in other countries. It protects your lender – not you – in case you default on your home loan.
You’ll generally need to pay LMI if your deposit is less than 20% of the property’s value. The cost of LMI can range from a few thousand dollars to tens of thousands, depending on your loan size and deposit amount. Some lenders allow you to capitalise LMI into your loan rather than paying it upfront.
Down Payment (Deposit)
Your deposit is the amount you contribute upfront toward your home purchase. In Australia:
- The typical minimum deposit is 5% of the property value
- A 20% deposit helps you avoid paying LMI
- Some first home buyer schemes allow lower deposit thresholds with no LMI
Saving a larger deposit not only reduces your loan size but can also lead to better interest rates and lower repayments.
Loan Term
The loan term is the length of time you have to repay your home loan. In Australia, common terms include:
- 25 years
- 30 years
- 40 years (less common)
A longer term usually means lower monthly repayments, but more interest paid over time. Shorter terms have higher monthly repayments, but you’ll pay the loan off sooner and save on interest.
Offset Account
An offset account is a transaction account linked to your mortgage. The money you keep in it offsets your loan balance for interest calculation purposes.
For example, if your loan is $400,000 and you have $20,000 in your offset account, your lender charges interest on $380,000 instead. This reduces the interest you pay and can help you pay off your mortgage sooner.
Redraw Facility
A redraw facility allows you to access extra repayments you’ve made on your mortgage. It’s handy if you need funds for emergencies or renovations, but some lenders may charge fees or limit how often you can redraw.
Comparison Rate
The comparison rate is designed to give you a more accurate picture of the true cost of a loan. It includes:
- The advertised interest rate
- Most fees and charges
It helps you compare loans more easily. Always check the comparison rate – not just the advertised rate – when evaluating loan options.
Loan-to-Value Ratio (LVR)
Your LVR is the percentage of the property’s value that you’re borrowing. It’s calculated as:
LVR = (Loan amount ÷ Property value) × 100
For example, if you’re buying a $600,000 property and borrowing $480,000, your LVR is 80%.
A lower LVR means:
- Lower risk for the lender
- Better chance of loan approval
- No LMI required if LVR is under 80%
Final Word
Understanding the key terms and features of your mortgage is essential for making smart, informed decisions. Whether you’re applying for your first home loan or considering refinancing, knowing the difference between amortisation and offset accounts or fixed and variable rates can make all the difference.
Take the time to learn the lingo, ask questions, and compare your options carefully. With the right knowledge in hand, you’ll be better equipped to choose the loan that fits your financial goals – and feel more confident every step of the way.