Property purchases are big and complex; there are boxes to tick, professionals to consult, negotiations to have, and forms to sign. And because this is far from a regular occurrence, first home buyers can feel like they’ve been thrown in the deep end, drowning in big numbers and odd words.
Thankfully there’s a way to simplify the process, make it more efficient and enjoyable, and ensure you secure the home you want at the price you want. All you need to do is learn the terms.
There are a wealth of property-specific words that you’ll only ever encounter as a property buyer and owner. Let’s take a look at 21 of the most common and confusing, and find out exactly what each means.
The terms appraisal and valuation may seem to be used interchangeably, but they shouldn’t be. ‘Valuation’ is the formal process of placing a value on a property (often with legal standing), while an appraisal is more of an informal figure; an educated guess on the property value that can serve as a guide in several situations.
2. Body corporate fees/strata fees
If you buy a unit, apartment, flat, villa or townhouse that shares common areas with other properties, the control and administration of these areas are governed by the body corporate; a group made up of the registered owners. Body corporate fees, otherwise called strata fees, ensure that these areas are maintained.
3. Comparison rate
The interest rate is the most important feature of any home loan, but it doesn’t tell the whole story - other fees will apply. The comparison rate adds these extra costs to the base interest rate, giving a consumer an idea of the ‘true’ cost of the loan, as well as the opportunity to quickly and easily compare loan against loan.
Contingencies are conditions that must be met to finalise the purchase of a property, e.g., a loan must be approved.
Conveyancing is the process of transferring the legal title of a property from one individual to another. In Australia, this can be done either through a lawyer or, more commonly, a specialist conveyancer.
6. Cooling off period
This is a legally required period after a contract has been signed, during which the purchaser is able to cancel. The length of time depends on the sale and the state.
Escrow is a contractual arrangement where money or property is transferred through a third party. This third party verifies the funds and holds them in a secure account for the seller, who then transfers the property to the buyer before receiving payment. An escrow account can also be set up by the lender to collect monthly payments from the buyer.
8. Fixed/Adjustable rates
A fixed rate and adjustable rate are the two main types of interest applied to mortgages. Fixed-rate mortgages charge a predetermined interest rate for a set period, or for the entirety of the loan. An adjustable-rate mortgage sees the interest rate change with the market but generally starts lower than a fixed rate.
9. Honey moon rate
The mortgage market is competitive, so lenders will try to entice customers by offering a honeymoon rate, in which a lower interest rate applies to the initial period of the loan, often 12 months. A higher than average rate can apply after the honeymoon period however, so research is important.
This is where a volume builder offers a home built on a specific parcel of land. This can be one of the most cost-effective ways of buying a new home.
11. Lenders mortgage insurance (LMI)
This is a type of insurance paid by the borrower to guard against the failure of the borrower to pay back the loan on time or in full. LMI is necessary when borrowers have less than a 20% deposit to put towards the home loan.
12. Offset account
An offset account is a way to use your savings to reduce your interest payments. Any balance in this account offsets your principal (see below). If your mortgage is $350,000 and your offset account has $20,000 in it, you’ll only pay interest on $330,000 of your mortgage.
13. PPOR or Investment
You can either buy a property as a PPOR - principal place of residence - or as an investment.
Before shopping for a home, you should seek pre-approval from your lender. This is a figure, usually announced in a formal pre-approval letter, that serves as an estimate of how much you’ll be able to borrow.
This is the amount of money you’ve borrowed to purchase a property. A mortgage is made up of two parts - the principal and the interest. The faster you pay the principal down, the less interest you’ll pay.
This is the process of restructuring your loan or replacing it with a new one, with different payment structures and rates. The purpose of refinancing is to find a way to pay less.
17. Site costs
Any cost related to preparing a site for construction is considered a site cost. These costs can include building permits, soil tests, builder’s insurance, temporary fencing, and any expenses related to actual works when preparing your site; things like slab upgrades, rock removal, and service installation.
18. Stamp duty
Stamp duty is a government tax on property purchases applied by each state. Stamp duty is calculated as a percentage and based on the total purchase price of the home.
19. Builder standard inclusions
Standard inclusions are the technical term used to describe the fixtures and fittings that are included in the price of a newly constructed home. Builders will also offer a range of upgrades that can dress up and customise a home.
20. Unconditional approval
Unconditional approval is confirmation that your lender is committed to lending you money. While you can start shopping for a property when you get pre-approval, you’ll only be able to receive your funds - and therefore buy a house - when you get unconditional approval from your lender.
21. Valuation shortfall
Valuation shortfall is a banking term that means the bank valuation is less than the price paid for a property and can see a lender offering less money than you need.
Your first property will almost definitely be the biggest purchase of your life. So while it will take a little time to familiarise yourself with the strange terms that you’ll encounter during the process, this investment, like that of the property itself, can pay itself back in a big way.