Home Loan terms to remember as interest rates go up

With RBA hiking interest rates once more, a few unfamiliar terms may have reared their head. If you’re finding yourself confused with the alien language that is home loans, don’t worry, we’ve compiled a short glossary of some terms to get you acquainted. 

What home loan terms should you keep in mind?

There’s a lot of home loan-specific language, and good portions of it are likely to be irrelevant to most borrowers. For instance, you probably don’t need to know about reverse mortgages if you’re not a retiree. 

Regardless of the kind of home loan you’re planning to get, knowing some of the language used can help you better understand what’s going on and, in turn, help you compare between offers. Some of the home loan terms to keep in mind include:

• Cash rate: This is the interest rate that is set by the RBA and is the interest rate that banks use to borrow from each other. This is why home loans are generally set above the cash rate as banks are businesses looking to make a profit. As of November, the cash rate was raised to 4.35%. 
• Comparison rate: when you see an interest rate for a home loan listed on a bank website or here on Mozo, you’ll tend to see an interest rate and a comparison rate—e.g. 5.60% p.a. (5.64% p.a. comparison rate). The comparison rate is basically the interest rate plus any other fees calculated together to give you the full interest rate. 
• Variable & fixed rate: A variable rate home loan can be changed at a moment's notice by a bank, either choosing to cut or hike it and usually in response to what the RBA does with the cash rate.
• Loan to value ratio (LVR): Your loan to value ratio is a measurement of how much you borrow from the bank vs your deposit. So, let's say the property you want to buy is worth $800,000—if you have a deposit of $160,000 and you borrow $640,000, then your LVR is 80%. 
• Refinancing: This involves paying off your loan with a new loan from a different bank, typically with a lower interest rate or with additional features. 
• Offset accounts: Usually only for variable rate loans, these work like savings accounts but, instead of earning interest, offset interest on your loan. For instance, say you have a $500,000 loan with a 6.50% p.a. interest rate and $50,000 in the offset account. This means you’ll only pay 6.50% p.a. on $450,000. Like a savings account, you can also withdraw your cash at any time, but you’ll also need to pay interest on the amount withdrawn. 
• Extra repayments: Unlike an offset account, when you make extra repayments you tend to commit that money much like your monthly payments. Some banks allow for withdrawal, but these are usually subject to an evaluation on an individual basis.

There are loads more terms involved in home loans separate from this, but most will probably only be relevant when looking at a specific type of home loan (such as refinancing). If need be, Mozo has guides on a bunch of home loan topics so you can rest assured that you’ll be able to parse out what’s relevant to your situation.

Looking at getting yourself a new home loan? Then check out our home loans hub page or compare some products below…