Lending Terms + Acronyms: A Plain-English Guide
Home lending comes with its own language. AIP, LVR, LMI, DTI and HEM can sound like alphabet soup when you are already trying to make a big financial decision.
This guide explains some of the terms you are most likely to hear when applying for a home loan, refinancing or buying property. You do not need to memorise them all. The aim is to help you feel more comfortable asking questions and understanding what is happening at each stage.
Download the full Lending Acronyms and Definitions guide (PDF)
Approval and borrowing terms
AIP - Approval in Principle
Also known as pre-approval or conditional approval. It is an indication that a lender may be willing to lend you up to a certain amount, subject to its remaining conditions. It can help you understand your estimated price range before you start seriously looking at property.
Borrowing capacity, borrowing power or serviceability
These terms describe how much a lender may be prepared to lend you under its responsible-lending rules. The assessment can include your income, expenses, existing debts, interest rates, credit history, dependants and the lender’s own policies.
Conditional approval
The lender has reviewed your application and is likely to approve it if the remaining conditions are satisfied. A satisfactory property valuation is a common condition.
Formal or unconditional approval
The lender has made its final decision and approved the loan for a specific amount and property. Always check that every condition has been satisfied before relying on an approval.
Ratios lenders use
DTI - Debt-to-Income ratio
Your total debt divided by your gross annual income. Lenders use DTI as one part of assessing whether a proposed level of borrowing is appropriate.
HEM - Household Expenditure Measure
A benchmark some lenders use when considering household living expenses. Lenders may compare the benchmark with the expenses you declare and generally use the figure required under their policy.
LVR - Loan-to-Value Ratio
The loan amount expressed as a percentage of the property’s value. For example, borrowing $350,000 against a property valued at $420,000 produces an LVR of about 83%.
LMI - Lenders Mortgage Insurance
Insurance that protects the lender if a borrower cannot meet the loan repayments and the property sale does not cover the outstanding balance. LMI usually becomes relevant when the LVR is above the lender’s policy threshold. Although the borrower commonly pays the premium, it protects the lender rather than the borrower.
Repayments and loan features
P&I - Principal and interest repayments
Each repayment covers interest and also reduces part of the amount borrowed.
IO - Interest-only repayments
For an agreed period, the required repayments cover interest without reducing the principal balance. The principal still needs to be repaid, and repayments may rise when the interest-only period ends.
Offset account
An everyday account linked to a home loan. The money held in the account is offset against the loan balance when interest is calculated, which may reduce the interest charged. Features and fees vary between lenders.
Redraw
A facility that may allow you to access eligible extra repayments previously made to your home loan. Availability and conditions depend on the lender and loan product.
Fixed and variable interest rates
A fixed rate is locked in for an agreed period. A variable rate can change over time, which means the required repayments may also change.
Buying-property terms
COS - Contract of Sale
The written agreement setting out the terms and conditions for the sale of a property.
Conveyancer or solicitor
A professional who helps manage the legal work involved in transferring property ownership from the seller to the buyer.
Cooling-off period
A limited period that may allow a buyer to withdraw after signing a contract. The rules vary, and auction purchases generally do not include a cooling-off period. Obtain legal advice about the contract and deadlines that apply to you.
Valuation or appraisal
An assessment of a property’s value. A lender may order a valuation as part of deciding whether the property is acceptable security for the loan.
Settlement
The final stage of the purchase, when the money is transferred and legal ownership passes from the seller to the buyer.
First-home buyer terms
FHB - First Home Buyer
A person buying their first residential property. The precise eligibility definition can vary between schemes and concessions.
FHOG - First Home Owner Grant
A government-funded grant that may assist eligible first-home buyers to buy or build a home. Eligibility rules, property requirements and amounts can change.
Australian Government 5% Deposit Scheme (formerly HGS, the Home Guarantee Scheme)
An Australian Government scheme that may help eligible buyers purchase a home with a deposit as low as 5% without paying LMI. It was previously known as the Home Guarantee Scheme (HGS), so you may still see that name used. Eligibility requirements apply - see the Australian Government 5% Deposit Scheme on the Housing Australia website.
Still unsure what a term means?
Lender wording and policies can differ, and a familiar term may work differently from one product to another. Ask questions before signing anything. I am happy to explain the language, how a feature works in practice and what may be relevant to your situation.
Book a chat if you would like to talk through your options.
This article is general information only and does not take into account your objectives, financial situation or needs. Lending policies, government schemes and eligibility requirements can change.