Home Loan Glossary for Expats
Not sure if you understand all the jargon bandied about during the home loan process? You’re not the only one. We’ve put together a list of the most common terms you might hear when buying or selling a house in Australia.
- ANZ: ANZ is one of Australia’s leading banks. Speak to Odin Mortgage about applying for an expat home loan with ANZ.
- Application Fee: Also referred to as an establishment fee, some lenders charge applicants for the internal costs and admin fees to process the loan. They are usually paid upfront and are non-refundable.
- Assets: An individual’s belongings, such as real estate investments, shares, savings accounts, cars, superannuations, and so on.
- Australian Citizen: Someone born in Australia. After 1986, anyone born in Australia with an Australian parent. Foreign residents can become Australian citizens after holding permanent residency for four years and meet the citizenship requirements.
- Australian Expat: An Australian citizen or permanent resident living abroad. They may work overseas or are retired.
- Australian Tax Return: Anyone earning income in Australia must lodge a tax return by the end of October for the previous tax year. Residents must pay tax on all income earned worldwide. Non-residents for tax purposes must only pay tax on Australian-sourced income, but at higher tax rates.
- Borrowing Power: The amount of money the lender is willing to let an individual borrow. It’s impacted by income currency, deposit size, and credit score.
- Break Cost: When a borrower makes additional payments, repays their home loan early, or refinances during a fixed-rate period, they might incur break costs. These are expensive fees that cover the lenders’ loss.
- Bridging Finance: A short term loan for purchasing a new property before selling an old property.
- Buyer’s Agent: A valuable member of the buyer’s team, they are individuals or a company working with the home buyer to locate and purchase a suitable property. They attend open houses and negotiate on the buyer’s behalf.
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- Capital Gains: The difference between what the property costs and what the homeowners sell the property for. To determine a capital gain, deduct all property expenses (including purchase price) from the final selling price.
- Capital Gains Tax: The Australian Tax Office charges tax on all capital gains. The ATO adds the capital gains to the individual’s income and charges the usual income tax rate on the individual’s total income and capital gain for that tax year.
- Capital Loss: If a property makes a loss (sells for less than the total expenses), then it’s called a capital loss. Individuals must report a capital loss on their tax return to deduct the expenses from their taxable income.
- Commonwealth Bank of Australia: Commonwealth Bank is one of Australia’s leading banks. Speak to Odin Mortgage about applying for an expat home loan with Commonwealth Bank.
- Company Title: A type of ownership for a unit in a building owned by a company. The individual buys a share in the company and earns the right to live in a specific unit. Many lenders aren’t keen on company title properties.
- Comparison Rate: Instead of just advertising an interest rate, lenders must show a comparison rate for each credit product. Comparison rates reveal the true cost of the loan, including loan application fees and ongoing admin costs.
- Conditional Approval: Before offering formal approval, the lender will review an individual’s application and offer a preliminary ‘yes’. This isn’t a guarantee of formal loan approval. They can still reject the application later in the process.
- Construction Loan: A home loan specifically for building a new dwelling or for major renovations on an existing property.
- Contract of Sale: A contract detailing the purchaser and vendors’ details, the property, and agreed conditions of sale. It’s a requirement for all property sales.
- Conveyancing: The conveyancer transfers the legal title of the property from the seller to the buyer. They oversee the exchange of contracts and settlement.
- Cooling-off Period: A requirement in most states, the cooling-off period is between two to five days after the sale contract is exchanged in which the buyer can back out of the agreement without penalties. They might have to pay a small termination fee of around 0.25% of the property purchase price.
- Credit Score: A credit score is a number reflective of an individual’s credit history, i.e., whether they have any late or missed payments. Lenders use credit reports to judge an applicant’s creditworthiness. A higher credit score might mean lower interest rates and better loan terms.
- Daily Interest: Interest on a home loan is calculated on a daily basis on the outstanding loan balance.
- Deposit: Lenders require a minimum deposit of 5% of the property price from most Australian expats and permanent residents (although, there are a few exceptions, such as with a guarantor loan). To avoid paying LMI, borrowers should offer a 20% deposit. Foreign purchasers may need a 30% deposit.
- Depreciation: A reduction in the property’s value over time owing to wear and tear. Depreciation is tax deductible.
- Equity: The proportion of the property the individual owns. After a few years, the property owner might have paid off $5,000 of the principal. It’s not subject to the lender’s interest anymore. Homeowners can use equity as a deposit to purchase another property, refinance to better rates, or release it as cash.
- First Home Loan Deposit Scheme: A government scheme allowing first time buyers to pay only 5% deposit without incurring Lenders Mortgage Insurance.
- Fixed Interest Rate: Some home loans have a fixed interest rate for the first few years, meaning that the borrower pays the same percentage of interest each month regardless of the market rate.
- Foreign Buyer’s Stamp Duty Surcharge: Foreign purchasers must pay a stamp duty surcharge of 7 – 8% in most states. If an Australian homeowner is buying a house with a foreign spouse, they might have to pay the surcharge.
- Foreign Currency: As an expat earning in another country, your foreign currency might be tier 1 or 2. The lender might only just 50 – 100% of your net income to account for instability.
- Foreign Investment Review Board: The FIRB assesses applicants from all foreign buyers. Typically, foreign purchasers can only buy vacant land or new dwellings. Australian citizens don’t need to consult the FIRB.
- Foreign Owner Surcharge Land Tax: Some states require foreign buyers to pay a land tax surcharge.
- Foreign Residents Capital Gains Withholding Tax: Buyers must withhold 12.5% of the property purchase price from a non-resident seller (for tax purposes) to pay to ATO. The seller can claim the withholding tax back after completing their tax return.
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- Genuine Savings: Finances that an individual saves for more than three months to use as a deposit on a home loan.
- Guarantor Loan: With a parent or friend signing as a guarantor on the loan (putting their own home equity forward as security), individuals with minimal or no deposits can borrow up to 105% LVR.
- Interest Only Home Loan: A loan type which offers an introductory period of paying interest only. After the period is up, the borrower must pay back the principal and interest.
- Interest Rates: Borrowers pay interest on their borrowed amount, either a variable rate fluctuating with the market or a fixed rate.
- Introductory Rate: A reduced interest rate for the first year of the home loan.
- Investment Property: When a borrower buys real estate with the intention of earning capital gains. They might rent it out.
- Investor Loan: Specific loan type for borrowers purchasing an investment property.
- Joint Tenants: Equal holdings of an asset between two or more people. If one dies, the rest inherit their share of the property.
- Land Tax: A tax levied on the value of the land, regardless of the property built. Different states have different land tax rules.
- Lender: A bank or financial institution lending funds for purchasers to buy property.
- Lenders Mortgage Insurance: Borrowers with a deposit lower than 20% are risky to the lender. Therefore, the borrower must take out insurance which protects the lender should the borrower default on their home loan. It can be a costly addition to the house buying process.
- Liabilities: A borrower’s other financial debt and credit, including credit cards, personal loans, and car loans.
- Line of Credit: A flexible loan—the borrower can spend a specified amount as they choose.
- Loan Term: The length of the loan. The maximum in Australia is 30 years.
- Loan to Value Ratio: Also known as LVR, the ratio of the home loan amount to the security deposit. To calculate, divide the loan amount by the purchase price and express it as a percentage. Most lenders require a minimum LVR of 80%.
- Low Documentation Loan: Loans designed for borrowers without sufficient or up to date financial information.
- Mortgage: A home loan; the borrower offers their property as security for the sums borrowed. If the borrower defaults on payments,
- Mortgage Broker: An intermediary between the borrower and lender, the mortgage broker helps individuals secure good deals on their home loans for a commission from the lender.
- NAB: National Australia Bank is one of Australia’s leading banks. Speak to Odin Mortgage about applying for an expat home loan with NAB.
- Negative Gearing: A popular investment strategy, negative gearing means making a loss on a property (e.g. expenses outweigh rental income). Investors can deduct losses from their taxable income.
- Non-resident: Someone without Australian citizenship or permanent resident. They may be a foreigner residing abroad or in Australia with temporary residence.
- Non-resident for Tax Purposes: The ATO judges residency differently. If a person has no financial obligation to Australia (they can prove this with a few tests), they may cease their tax residency. Therefore, they only have to pay tax on Australian sourced income. Tax residents must pay tax on worldwide income.
- Non-resident Income Tax: Foreign residents for tax purposes are charged a higher tax rate on Australian sourced income and capital gains with no tax-free threshold.
- Offset Account: A transaction account which offsets the amount held against the interest on an individual’s home loan.
- Owner Occupier: A person owning and living in the property, as opposed to renting it to others.
- Permanent Resident: A permanent resident is someone with permission to spend an unspecified amount of time living and working in Australia. However, they are not yet Australian citizens.
- Positive Gearing: Making a profit on an investment property, i.e., rental income outweighs expenses.
- Power of Attorney: Someone with the authority to act on an individual’s behalf on all financial and legal matters. Some lenders require expats to have a Power of Attorney in Australia to conduct the borrowing process.
- Principal: The outstanding loan amount on which the borrower pays interest.
- Principal and Interest Loan: A standard loan where the borrower repays the principal and interest at the same time.
- RBA: The Reserve Bank of Australia sets the cash rate each month which determines the market interest rate.
- Real Estate Agent: An individual or company working on behalf of the vendor to help sell the property for the best price.
- Redraw Facility: A home loan feature allowing borrowers to withdraw money they have previously put towards additional payments.
- Refinancing: When a borrower replaces or extends their current loan with a new one from the same or a different lender. Borrowers may refinance in order to get lower interest rates, release equity, or access additional loan features.
- Rental Yield: The profit made on an individual’s rental property, i.e., the gap between rental income and expenses paid on the investment loan and upkeep of the home.
- Rentvesting: When an individual purchases an investment property in a more affordable location while renting a property in a more expensive place that they would like to live in. It enables expats and first time buyers to get on the property ladder without sacrificing their lifestyle.
- Repayment Holiday: If an individual is in mortgage stress or has previously made extra repayments, the lender might agree to a repayment holiday. Essentially, the borrower pauses their scheduled repayments.
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- Security: The property is usually used as security. This means the lender has the legal right to take ownership of the property should the borrower default on their home loan.
- Settlement Period: The period in which the home buyer organises formal approval on their home loan application and building and pest inspections on the property. On the settlement date, the sales contract is exchanged, the money paid, and the title of ownership transferred to the buyer.
- Split Loan: A loan with both fixed and variable interest rates on different portions of the principal.
- Stamp Duty: A tax calculated on the property’s value when an individual purchases a house. Foreign buyers may have to pay a stamp duty surcharge.
- Strata Title: A property type within a building, such as a unit or apartment. The buyer owns a unit, or lot, within a strata plan. They usually have to pay strata fees to the building manager.
- Subject to Finance: A clause in the home loan that provides security for the buyer if they cannot find approval for their home loan before the settlement date.
- Tax Deductions: Taxpayers can deduct property-related expenses from their taxable income, such as property management fees, advertising for tenants, and maintenance.
- Tax Resident: Someone with financial ties to Australia who has to pay tax on their worldwide income and capital gains. Generally speaking, tax residents live and earn in Australia. Expats can usually cease their residency.
- Tax Treaty: When tax residents earn income in two countries, they may have to pay double tax. If Australia has a tax treaty with the other country, the individual can claim credit on their tax return. Also known as a Double Taxation Agreement; Australia has more than 40 tax treaties.
- Title Search: A request to the Lands Titles Office to determine the owner of a particular property and any encumbrances (mortgages), covenants, or easements on the title.
- Unconditional Approval: When the lender has thoroughly checked an individual’s financial records and credit report and completed a property valuation, they may offer formal or unconditional approval. This means that they are prepared to lend the borrower the funds to purchase the property.
- Unencumbered: A property without any encumbrances (mortgages) or other restrictions.
- Variable Rate Loan: The interest rate fluctuates from month to month with the RBA’s cash rate. Fixed-rate loans revert to variable interest rates after a specified period (usually from one to seven years).
- Vendor: The seller of a property.
Frequently Asked Questions
Can Expats Get a Mortgage in Australia?
Expats are Australian citizens and, therefore, eligible for all home loan options. As an expat, you can apply for a fixed-rate, interest-only, or variable rate loan. Plus, you can negotiate additional features, such as an offset account or redraw facility.
The only issue expats may face is proving their foreign income to a lender. Generally speaking, lenders judge foreign currency harshly. A mortgage broker can help you find a home loan that is suitable for your situation.
Can Australians Living Overseas Buy a House in Australia?
Australians living overseas may need the help of a buyer’s agent and mortgage broker to conduct their property and loan search while they are abroad. If jointly buying a property with a foreign spouse, you may have to pay the foreign buyer’s stamp duty surcharge of 7 – 8%. To avoid this, only include your spouse’s name on the mortgage application, not the property title.
How Many Australians Live Overseas?
Australia proportionately has one of the lowest overseas populations. Numbers range from estimates of 500,000 to a million Aussies living overseas, although most studies are at least five years old. The most popular countries for Aussie expats are the UK, the US, New Zealand, China, Singapore, and Hong Kong.
Do Australian Banks Lend Money for Overseas Property?
Most banks will not allow borrowers to use an overseas property as security for a home loan. If you want to buy a home abroad, you will either need to apply for a mortgage in your new country or release equity on an Australian property to pay for your new home.
Can a Foreigner Buy a House in Australia?
Non residents can purchase property in Australia. However, they will need to apply to the FIRB and may only purchase new dwellings or vacant land with the intention to build. Foreign purchasers will also face foreign buyers stamp duty and land tax surcharge.