Buying a home is an exciting milestone—but let’s face it, mortgage jargon can make things feel overwhelming. Terms like amortisation, escrow, and PMI may sound technical, but they’re important for understanding how your mortgage works and making informed decisions.
Whether you’re preparing to apply for your first loan or just brushing up on the basics, this glossary-style guide will help you feel more confident navigating your home loan journey.
Amortisation
What it means: Amortisation is the process of gradually paying off your mortgage through regular repayments that cover both principal and interest.
Why it matters: Early in the loan term, most of your repayment goes toward interest. Over time, more goes toward paying down the principal. This structure helps you track your progress and estimate how much equity you’re building in your home.
Escrow
What it means: An escrow account holds funds (like your property taxes and homeowners insurance) that are paid on your behalf by your lender.
Why it matters: Your mortgage repayments may include contributions to this account to ensure those bills are paid on time, avoiding missed payments or penalties.
Principal
What it means: The principal is the amount you borrow from your lender, excluding interest.
Why it matters: Every repayment you make reduces the principal and builds equity. The faster you reduce the principal, the less interest you pay over time.
Interest Rate
What it means: This is the percentage you’re charged by the lender to borrow money.
Why it matters: Even a small difference in interest rates can make a big impact on your repayments and the total cost of your loan. Lower interest rates = lower long-term costs.
Fixed Rate vs. Variable Rate Mortgage
- Fixed Rate Mortgage: The interest rate stays the same for the duration of the loan.
- Variable Rate (or Adjustable-Rate) Mortgage: The interest rate may go up or down based on market conditions.
Why it matters: Fixed rates offer certainty; variable rates can offer initial savings but carry risk if interest rates rise.
Closing Costs
What it means: These are the fees you pay to finalise the mortgage and property transfer.
What’s included: Legal fees, stamp duty, valuation fees, and lender charges.
Why it matters: These costs typically range from 2% to 5% of the loan amount, so it’s important to budget for them.
Private Mortgage Insurance (PMI)
What it means: PMI is a type of insurance that protects the lender if you default on your loan, usually required when your deposit is less than 20%.
Why it matters: PMI increases your monthly repayments. Once you’ve built enough equity, you may be able to remove it.
Down Payment
What it means: This is the upfront amount you contribute toward the property purchase, usually between 5% and 20%.
Why it matters: A larger down payment lowers your loan amount, reduces your monthly repayments, and may help you avoid PMI.
Loan Term
What it means: The number of years you have to repay the loan—commonly 15, 20, or 30 years.
Why it matters: Shorter terms mean higher repayments but less interest overall. Longer terms spread out the cost but increase the total interest paid.
Bonus: 5 Quick Tips to Qualify for a Mortgage Like a Pro
1. Improve Your Credit Score
Aim for a score of 620 or above. Pay bills on time and avoid new debt in the lead-up to applying.
2. Reduce Your Debt-to-Income Ratio
Keep your total debt payments below 43% of your income to increase approval chances.
3. Save for a Bigger Deposit
The higher your down payment, the better your loan terms—and the lower your repayments.
4. Maintain Job Stability
Lenders love consistent income. Try to avoid switching jobs during the application process.
5. Get Pre-Approved
Know how much you can borrow and show sellers you’re serious. This can speed up the buying process.
By understanding these common mortgage terms and preparing your finances early, you’ll put yourself in a strong position to secure a home loan that suits your budget and goals.