Busting Common Bank Lingo: Home Loan Terms Explained

Applying for a home loan can feel like learning a new language. Between offset accounts, comparison rates, and LVRs, it’s easy to feel lost in a sea of jargon.

Whether you're buying your first home, refinancing, or just curious, we’ve broken down the most common bank lingo and home loan terms so you can navigate the process with confidence.

🔑 1. Principal

What it means:

The principal is the amount of money you borrow from the lender (excluding interest).

🧠 Example:

If you borrow $500,000, that’s your principal. The bank then charges interest on this amount.

💰 2. Interest Rate

What it means:

This is the percentage charged by the lender for borrowing money. It can be fixed, variable, or a split between both.

Fixed: Rate stays the same for a set period (e.g. 2 or 3 years)

Variable: Rate can move up or down with the market

Split: Part fixed, part variable

📌 Your repayments are calculated based on your interest rate + the loan amount.

🔍 3. Comparison Rate

What it means:

This is a more accurate reflection of the true cost of a loan, because it includes the interest rate plus most fees and charges.

📉 Why it matters: Two loans may have the same interest rate, but different comparison rates. Always compare this to know the real cost.

🏦 4. Offset Account

What it means:

A bank account linked to your home loan. The money in this account reduces the amount of interest you’re charged on your loan.

🧠 Example:

If your loan is $400,000 and you have $20,000 in your offset account, you only pay interest on $380,000.

💡 Great for saving on interest while keeping your money accessible.

📈 5. Loan-to-Value Ratio (LVR)

What it means:

LVR is the percentage of the property’s value that you're borrowing. It’s used to assess risk.

Formula:

Loan Amount ÷ Property Value x 100 = LVR%

🧠 Example:

Borrowing $400,000 on a $500,000 property = 80% LVR

🔒 If your LVR is over 80%, lenders usually charge Lenders Mortgage Insurance (LMI).

🔐 6. Lenders Mortgage Insurance (LMI)

What it means:

LMI is an insurance you pay to protect the lender, not you, in case you can’t repay the loan.

It’s typically required if your LVR is over 80% (i.e. you have less than a 20% deposit).

💸 It can cost thousands, but allows buyers to enter the market sooner with a smaller deposit.

⏱ 7. Loan Term

What it means:

The length of time you agree to repay the loan, usually 25 to 30 years.

Shorter terms mean higher repayments but less interest overall. Longer terms have lower repayments but more interest over time.

🔁 8. Refinancing

What it means:

Replacing your existing home loan with a new one—either with the same lender or a new one—to get better rates, access equity, or change loan features.

🔄 Refinancing can save you thousands, but always check fees, break costs, and suitability.

💳 9. Redraw Facility

What it means:

A feature that allows you to withdraw any extra repayments you’ve made on your home loan.

💡 Redraw is different from an offset—your money reduces your loan balance but isn’t as freely accessible.

🧾 10. Pre-Approval (Conditional Approval)

What it means:

An indication from a lender that you can borrow up to a certain amount, based on your current financial info. It’s not a loan offer.

✅ Useful when house-hunting to know your price range. Still subject to full approval later.

✨ Final Thoughts

Understanding home loan lingo doesn’t have to feel like decoding a secret code. By learning a few key terms, you’ll be better equipped to:

Ask the right questions

Compare loan options properly

Make confident, informed decisions