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Skip to content.Contact Support 1300 799 109 Allhomes Commercial Real Estate Navigation Log inAccount Log in * Find a Property * Research * Find Agents * For Owners * NewHome Loans * News * Commercial * Home * Money & Markets * Five common yet confusing property finance terms explained * Find a Property * Buy * Rent * House & Land * New Homes * Rural * Share * Search by school * Research Property Market Insights * Property Price Estimates * Suburb Profiles * Property Market Analysis * Auction Results * Sold Properties * Find Affordable Suburbs Guides * Advice * Buying * Investing * Renting * Find Agents * For Owners * My Properties * Sell * Home LoansNew * Refinance Onlinewith Domain Home Loans * Explore Home Loans * Repayment Calculator * Stamp Duty Calculator * Refinance Savings Calculator * Equity Calculator * Borrowing Power Calculator * Fixed Rate Expiry Calculator * News * Property News * Money & Markets * Living * Domain Review * Commercial By Daniel Butkovich September 29, 2023 FacebookTwitterPinterestCopy link Property terminology can be confusing, but arming yourself with knowledge improves the chances of success. Photo: iStock FIVE COMMON YET CONFUSING PROPERTY FINANCE TERMS EXPLAINED By Daniel Butkovich September 29, 2023 FacebookTwitterPinterestCopy link Property finance is riddled with terminology and jargon that can confuse even experienced buyers and sellers, let alone first-timers. Arming yourself with knowledge before making a move improves your chances of success in the long run. CASH RATE The cash rate serves as a benchmark from which interest rates for home loans and savings accounts are based. It’s the rate used for unsecured overnight loans between banks or, in other words, the interest rate at which banks borrow or lend money to each other. Each month, the Reserve Bank of Australia board meets and sets a cash rate target. Lowering the cash rate makes home loans cheaper, and is done to encourage borrowing and economic activity. Raising the cash rate increases the cost of borrowing and helps moderate economic growth, and is usually done to control inflation. Mortgage rates are typically a few percentage points higher than the cash rate, reflecting banks’ profit margins. In most cases, when the cash rate goes up or down, the rate borrowers pay on variable loans also changes, although not always by the corresponding amount. * Read more: When will interest rates rise and how can home buyers and owners prepare? REPAYMENTS CALCULATOR SEE HOW MUCH YOUR MONTHLY REPAYMENTS WOULD BE. Calculate Domain Home Loans, Credit Representative 500208 of Lendi Group Finance Pty Ltd, Australian Credit Licence 442372. LOAN-TO-VALUE RATIO This ratio reflects the size of the loan in proportion to the value of the property. It’s expressed as a percentage, calculated by dividing the amount borrowed by the value of the property. A lower loan-to-value ratio (LVR), such as 60 or 70 per cent, will usually make a mortgage less risky for a bank. If the owner defaults and the bank forces a sale, there is a lower chance that the property’s value will be less than the loan. When a property is purchased with a higher LVR, such as above 80 per cent, it’s often a condition of the loan that the borrower buys lenders mortgage insurance. * What buyers need to know before applying for the First Home Loan Deposit Scheme LENDERS MORTGAGE INSURANCE Commonly abbreviated to LMI, lenders mortgage insurance protects the lender from a financial loss if the borrower defaults on a home loan and there is a shortfall in value after the sale of the property. GET THE BEST PROPERTY NEWS AND ADVICE DELIVERED STRAIGHT TO YOUR INBOX. Become a member Check out our Privacy policy. LMI is usually a one-off payment made by the borrower at settlement, and is required when buying with a loan-to-value ratio above 80 per cent. For a $750,000 property with an LVR of 85 per cent, borrowers should expect LMI to cost about $8000. If the LVR is 95 per cent, the cost could be about $30,000. Some borrowers with smaller deposits choose to pay LMI to get into the property market sooner. Other buyers with smaller deposits may have a parent act as guarantor to avoid paying LMI at all, and it may be waived for borrowers in certain high-income professions. * What is lenders mortgage insurance, and is it really that bad? HOME LOAN PRE-APPROVAL Home loan pre-approval, also known as conditional approval, provides a borrower with a non-binding indication of the amount of money a specific lender may lend, after reviewing their financial situation. It is subject to several conditions, including a valuation of the property and further verification of the borrower’s financial information. Pre-approval gives buyers a spending limit, as well as the confidence to pursue properties within a set price bracket and submit offers. It’s typically valid for 90 days and can be extended with updated information. Buyers should arrange pre-approval as soon as they’re serious about buying a property, and definitely before bidding at auction, as auction sales are unconditional and cannot be subject to additional finance approval. * How to get pre-approved for a home loan OFFSET ACCOUNT An offset account is a bank account linked to a home loan that can reduce the interest payable on the loan. When determining the interest to be charged on the loan, any money in the offset account is deducted from the loan balance. For example, a borrower with a $500,000 loan and $50,000 in their offset account will only pay interest on $450,000. However, no interest is earned on money in an offset account. Keeping money in an offset account reduces a borrower’s interest payments, which increases household cash flow and allows savings in the offset account to accumulate faster. This creates a “feedback loop” which further increases the rate borrowers can save. Offset accounts operate like standard transaction accounts, giving borrowers control over their money. Keeping money in an offset account has the same effect of making extra repayments, but with added flexibility and no redraw limits or fees. See the Domain Dictionary for more property and finance definitions. Got questions about home loans? Ask a Home Loan Specialist Book an appointment Domain Home Loans, Credit Representative 500208 of Lendi Group Finance Pty Ltd, Australian Credit License 442372. ExplainerFirst Home BuyersHome LoansInterest RatesLoans and finance FacebookTwitterPinterestCopy link WE RECOMMEND HOW LONG DOES IT REALLY TAKE TO GET A HOME LOAN THESE DAYS? WHY THE RESERVE BANK IS WORRIED ABOUT RISING HOUSE PRICES IS THIS THE IDEAL SYDNEY POSTCODE FOR AN ACTIVE LIFESTYLE? 55 MCGS: E-COMMERCE SURGE TO LIFT DEMAND FOR DEDICATED WAREHOUSE SPACE HOW A FARMER’S HOUSE BECAME AN ARCHITECTURAL GEM RECOMMENDED FOR YOU 'BRIEF REPRIEVE': HOME OWNER RELIEF AS RBA HOLDS OFFICIAL INTEREST RATE AT 4.1 PER CENT THE HILLS SHIRE: THE COMMUNITIES FAMILIES ARE FLOCKING TO AND REFUSING TO LEAVE DECEPTIVE DECIMALS POINTS: HOW 0.5 PER CENT COULD COST YOU $57,064 MORE ON YOUR HOME LOAN BROOKFIELD’S SYDNEY SKYSCRAPER DEFIES OFFICE WOES WITH ‘HOUSE FULL’ SIGN THINGS YOU SHOULD KNOW The information on this website is intended to be of a general nature only and doesn't consider your objectives, financial situation or needs. © Domain Holdings Australia. * Help * Contact * About * Careers * Mobile * Privacy Policy * Go to the Top * Domain Marketing Hub * Agent admin This site is protected by reCAPTCHA Enterprise and the Google Privacy Policy and Terms of Service apply. 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Commercial Real Estate * Commercial Property * Business for Sale * Commercial Property News * Commercial Real Estate Agent search * Domain Home Loans * Facebook * Instagram * Pinterest * Youtube * Tiktok FIND AND APPLY FOR A COMPETITIVE HOME LOAN* All where you can find your next home. Get started *All applications are subject to lender assessment and approval. Domain Home Loans Credit Representative 500208