Loan Dictionary
A helpful resource to explain different home loan terms
Bridging Finance
A bridging loan provides funds to buy your next home before you’ve sold your current one. It covers the deposit and other buying costs, such as Stamp Duty. Once you settle on your old home, the proceeds of sale are paid as a lump sum to reduce your interest repayments on the bridging loan.
Capital Gains Tax
Capital gain on an asset is the difference between what it cost you and what you sell it for. Tax is payable on capital gains. Personal assets, such as your home, car and furnishings are exempt from capital gains tax. Depreciating assets – such as business equipment or fittings in a rental property – are also exempt from capital gains tax. Capital loss on a taxable asset can be used to reduce any capital gain in the following year.
Equity
Equity is the difference between the value of your home and the amount you owe on it. For example, if your home is worth $900,000 and you owe $500,000, your equity is $400,000. As you pay off your home loan, your equity increases. You can borrow against the equity in your home to buy an investment property.
First Home Owners Grant (FHOG)
The NSW Government provides the First Home Owner Grant (FHOG) as financial assistance for first home buyers in NSW. The First Home Owner Grant currently gives first home buyer a lump sum benefit of $10,000 to be used towards your deposit of your home loan or paying relevant expenses such as pest and building reports. The $10,000 grant is payable to all first home buyers where the home being purchased or built and has a total value less than $650,000.
First Home Plus Scheme (FHPS)
The NSW First Home Plus Scheme (FHPS) provides exemptions or concessions on Stamp Duty up to $17,900 for eligible first home buyers, including vacant land on which you intend to build your first home:
- Stamp Duty exemptions for homes valued up to $500,000
- Stamp Duty concessions for homes valued between $500,000 and $600,000
- Stamp Duty exemptions for a vacant block of residential land to build your home
- Stamp Duty concessions for vacant land valued between $300,000 and $450,000
Fixed Rate
The interest rate of a fixed rate home loan is locked in for a specified period, often a number of years, regardless of changes to interest rates.
Interest Only
An ‘interest-only’ home loan requires a borrower to pay only the interest component of the loan. This structure requires the repayment of the original borrowed amount in a lump sum when the home loan period is complete or the property is sold. Most interest-only home loans revert to a principal and interest loan after a set initial period.
Interest-only home loans are more widely used by investors, who are attracted by the tax saving aspects and are usually not likely to hold the property for the term of the home loan. They are not ideal for owner occupiers who are more focused on building equity in their property, as the underlying home loan debt is not reduced with interest-only.
Be aware though that with an interest-only home loan, there is still the potential for the property to increase in capital value as real estate prices rise, which will have a positive impact on the borrower’s equity. An interest-only home loan works well for investors who want to use the property to generate rental income and capital gains.
Loan Portability
Loan portability means transferring the loan on your current home across to purchase a new property. Some home loans offer this as a feature, so you don’t need to refinance when you upgrade to your next home. Bringing your old home loan with you works if you’re selling and buying at the same time. While you have the convenience of staying with your current home loan, and you don’t need to pay for bridging or refinancing, there are normally fees attached to using this feature. If you’re sure the home loan you already have is the best deal for you, then loan portability may be worth exploring.