Understanding your home loan: property and finance jargon explained

Navigating all the paperwork involved in securing a home loan can be a little overwhelming at times – particularly as a first-time buyer confronted with an array of industry jargon.

We reveal a few of the most commonly misunderstood industry terms and explain what they actually mean in simple English.

What is bridging finance?

Bridging Finance is a loan that a seller can apply for if they need money urgently and can’t afford to wait the three or so months between the sale of their property and the date of transfer. It’s a bit like an advance on a salary – only you pay interest on the money you borrow. 

What does consolidation of debt mean?

Consolidation of debt is a service generally only available to existing bondholders and is typically used in situations where someone has gotten in over their head with numerous accounts or loans. The idea is to pay off all your outstanding debts using money from your bond - with the permission of your bank, of course - and then repay that money as part of your monthly bond instalment at the lower interest rate of your home loan. This can significantly reduce your monthly expenses but can be difficult to do under the regulations stipulated by the National Credit Act.

What is equity?

People often get confused between equity in a bond and equity in a property. Equity in a bond is the amount of additional money you’ve put in, above and beyond your minimum repayments. This can be withdrawn if you have an access facility. Equity in a property, however, is the amount by which your home’s value has increased since your loan was granted. If this amount is significant, you could potentially convince your bank to increase your bond accordingly.

What is a bond guarantee?

Guarantees are typically required when you’re buying a property. The seller needs some kind of guarantee that you’ll be able to afford the property. The simplest way to do that is to provide bond approval documentation or hand over a hefty deposit if you plan on paying in cash. 

What is a suspensive condition?

A suspensive condition is something that has to occur before a signed offer to purchase is considered final. If a suspensive condition is not met, the offer to purchase falls through, so it has to be clearly stated and agreed upon by both the buyer and seller. Typical suspensive conditions requested by buyers include successful bond approval, the sale of an existing home, or a positive home inspection or structural report. Sellers can also request suspensive conditions, such as a 72-hour clause allowing them to accept equal or higher cash offers.

What is surety?

Signing surety means taking responsibility for repaying a home loan if a bond-holder defaults for any reason. It’s quite common for parents to sign surety for a purchase made by their child. What many people don’t realise, however, is that unless you specifically limit your surety to a certain percentage, you’ll be responsible for the full outstanding amount of the bond.

What does RTI stand for?

RTI stands for “Repayment to Income” and refers to the percentage of your gross income that will go towards your bond repayments. The legislated maximum RTI is 30%, which means the highest bond repayment that anyone can qualify for is 30% of their monthly income, before expenses.

What does LTV stand for?

LTV stands for “Loan to Value” and simply means the percentage of the value of the property that is financed by the bank. Normally, this is around 80 to 90%, but can be as much as 104% with a Cost.

Remember, if you don’t understand something at any stage, just ask your bond originator, estate agent, or even attorney to explain. There’s no reason your documentation should be a source of stress or confusion.

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