The mortgage language you must understand

AUSTRALIANS lacking basic knowledge about their home loans are risking financial disaster. Here, the experts explain what you need to know.

BASIC home loan words including principal, interest and refinancing are leaving many Australians scratching their heads because they don’t understand their definitions.

But fear not, those unsure of the meanings of mortgage lingo are certainly not alone.

Asking what money terms mean can be intimidating and often leave people embarrassed, but experts say this shouldn’t put you off.

A young couple meeting with their mortgage broker after making a property purchase.

New Galaxy research compiled on behalf of lender State Custodians has revealed a large portion of people do not fully understand what these financial terms mean:

— Interest (32 per cent don’t understand)

— Principal (52 per cent)

— Refinancing (52 per cent)

— Line of credit (56 per cent)

— Redraw facility (57 per cent).

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The lender’s general manager, Joanna Pretty, said it’s “alarming” so many people don’t have basic home loan knowledge but it’s pretty easy to turn this around.

“The more research you do the better off you will be, you can anonymously do searches online to find out these terms,’’ she said.

“The beauty of researching online is that it will give you all the definitions but you still need to talk to somebody that you trust who is independent.

“For example if you are not sure what terms such as ‘principal’ and ‘interest’ means you need to ask somebody what this will mean for you.”

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State Custodians' general manager Joanna Pretty said people shouldn’t be afraid to ask questions if they don’t understand money terminology.

Ms Pretty said the danger of not understanding money terminology is that it could leave you under a “mistaken illusion” you’re in a better financial position than you are.

For instance, if you have only been paying down the interest on a loan and have never eaten into the principal this could end up costing you hundreds of thousands of dollars extra over the life of the loan.

“That can be a very rude shock for people,’’ Ms Pretty said.

The Australian Securities and Investments Commission’s MoneySmart calculator has more than 70,000 monthly users and senior executive leader, Laura Higgins, said this proves people are gradually becoming more engaged with their finances.

There’s plenty of online resources that can help people understand finance.

“The MoneySmart site gives you unbiased and trusted information and there’s a glossary of terms to help people,’’ she said.

“You have to do your homework and have a relationship with your bank and whatever financial service providers you are interacting with, you need to ask them questions.”

More of the most confusing money terms for people are: offset account, comparison rate, lenders’ mortgage insurance, bridging loan and split loan.

Ms Higgins said there’s always “growing jargon” that makes it difficult for people to keep up with.

KEY TERMS:

Principal: The original sum of money borrowed.

Interest: Charge for borrowing money using an interest rate.

Refinancing: To replace or extend an existing loan with the same or new lender.

Line of credit: A loan arrangement with a limit that can be used by the customer.

Redraw facility: Excess money paid on the loan that can be accessed when necessary.

Offset account: Money kept in a daily account linked to the home loan to reduce the interest payable.

Comparison rate: An interest rate that includes all the fees and charges associated with the loan.

Lenders’ mortgage insurance (LMI:) One-off insurance premium payable by the borrower that protects the bank against the potential loss if they loan cannot be repaid.

Bridging loan: A short-term loan that covers the time gap between the purchase of a new property and the sale of an old property.

Split loan: When a borrower fixes a portion of the loan and leaves some variable.

@sophieelsworth