Researching home loans can feel like learning a new language, with the added pressure of knowing the decision you make could shape your finances for years to come. With so many terms, features and acronyms in play, it’s easy to feel unsure what they all mean.
If you’re struggling to tell your LVR from your LMI, you’re not alone. At Bluestone, we believe confidence comes from clarity. That’s why we’ve pulled together a practical guide to some of the most common home loan terms, so you can compare your options with more confidence and make informed decisions that suit your situation.
Cash out
Cash out is a form of refinancing that allows you to access the equity in your property and receive part of your loan as cash.
When applying for cash out, lenders may ask how you intend to use the funds. Common uses include consolidating other debts, investing, or covering costs such as renovations.
At Bluestone, eligible borrowers with sufficient equity may be able to refinance and access funds for approved personal or investment purposes, subject to lending criteria.
Cash out can be a helpful way to put your equity to work, but it’s important to consider the long-term impact. Increasing your loan balance means higher repayments, so it’s worth making sure the benefits stack up over time.
Fixed rate vs variable rate
Understanding the difference between fixed and variable rates is an important step when comparing home loans.
A fixed-rate loan locks in your interest rate for a set period, often between one and ten years. During this time, your repayments stay the same, which can make budgeting easier. However, fixed rates can come with trade-offs, such as:
- No benefit if variable rates fall
- Break costs if you refinance or repay early
- Limits on extra repayments
With a variable-rate loan, your interest rate can move up or down over time, influenced by market conditions and funding costs. This means repayments can change, but variable loans often offer more flexibility.
Depending on the loan, features may include extra repayments, redraw facilities, or an offset account, giving you more control as your circumstances change.
Full doc vs alt doc
When applying for a home loan, lenders need to verify your income. For borrowers in PAYG employment, this is usually straightforward. For self-employed borrowers, it can be more complex.
Different lenders accept different forms of documentation.
- Full doc: Typically involves two years of tax returns and notices of assessment.
- Alt doc: An alternative way to verify income, often using bank statements, business activity statements or an accountant’s letter.
While some lenders only accept full documentation, others, like Bluestone, assess applications using alternative documentation. This can help self-employed borrowers and business owners access lending options that better reflect how they earn.
Interest-only period
An interest-only period allows you to pay only the interest on your loan for a set time. While this reduces repayments in the short term, the loan balance does not decrease, which can increase the total interest paid over the life of the loan.
Interest-only loans can suit certain scenarios, such as short-term strategies or some investment situations. However, once the interest-only period ends, repayments usually increase as you begin repaying the principal over a shorter timeframe.
Thinking ahead is key. It’s worth weighing the short-term cash flow benefits against the longer-term cost.
Lender mortgage insurance (LMI)
Lender mortgage insurance protects the lender if the loan balance cannot be recovered in full after a property sale. It’s commonly required when the deposit is less than 20 per cent of the property value and is usually added to the loan as a one-off cost. LMI policies vary by lender.
At Bluestone, lender mortgage insurance is not required on our home loans, although a risk-based fee may apply in some scenarios.
Loan to value ratio (LVR)
Loan to value ratio, or LVR, is the percentage of a property’s value that you are borrowing. It plays a role in loan eligibility, pricing and whether additional costs like LMI apply.
Higher LVRs mean smaller deposits, but also higher loan balances and interest costs over time. Many lenders require LMI above an 80 per cent LVR, which is why some borrowers aim for a larger deposit or seek lenders with alternative approaches.
Offset account
An offset account is a transaction account linked to your home loan. The balance is offset against your loan balance when interest is calculated, which can reduce the amount of interest charged.
Many borrowers use offset accounts to hold savings or receive their salary, as home loan interest rates are often higher than savings rates.
Pre-approval
Pre-approval, also known as conditional approval, is an indication from a lender that you may be eligible for a loan up to a certain amount, subject to conditions.
It can help you search for a property with a clearer sense of budget, but it’s not a guarantee. Changes in circumstances or policy can still affect the final outcome.
Redraw facility
A redraw facility allows you to access extra repayments you’ve already made on your loan. These funds can be useful for unexpected expenses, while still reducing interest when left in the loan.
As with any feature, it’s worth considering whether redraw aligns with how you plan to manage surplus cash.
Risk fee
A risk fee is a one-off fee charged by the lender in some situations where the loan is assessed as higher risk. This may relate to factors such as credit history or income verification.
Unlike LMI, a risk fee is paid to the lender and is usually added to the loan balance rather than paid upfront.
At Bluestone, risk-based pricing may apply depending on the borrower’s circumstances and loan profile.
The information provided in this article is general in nature and has been prepared without considering your requirements, objectives or financial situation. Bluestone Home Loans are administered by Bluestone Servicing Pty Ltd ACN 122 698 328, Australian Credit Licence 390183 on behalf of the Credit Provider, Permanent Custodians Ltd ACN 001 426 384. All loans are subject to suitability and credit assessment. Fees, terms, conditions, and lending criteria apply.
