What are the basic elements of a home loan or mortgage?

Principal, interest, term & repayments.

Here we explain a number of the basic terms and definitions used in home loans, mortgages and business finance:

  1. Principal
  2. Interest
  3. Term
  4. Repayments
  5. Amortisation
  6. The Mortgage – or Security itself

1) Loan principal

“Principal” is the amount of money you borrow from the Lender when you take out a home loan, mortgage, or other finance.

2) Loan interest

“Interest” is the fee the lender charges you for the use of their money. The interest charge on your loan depends on the amount of money you borrow, the interest rate, and the term of the loan.

3) Loan term

“Term” is the agreed period you have to repay your loan. For some loans, this could be a year or less, while for most home loans it is 25-30 years.

4) Loan repayments

Over the term of the loan, you make repayments on a regular basis – typically monthly. These repayments generally cover the interest charge and a portion of the principal.

5) Loan amortisation

This is a scary sounding term but it’s just another way to describe the repayment of your debt. Over the term of the loan, your regular repayments are said to “amortise” the loan. To learn more about mortgages & home loans, talk to an MFAA member.

6) The Mortgage or security

When you use a lender to finance your property purchase, the lender takes a charge noted on the title document which is known as a ‘mortgage’. They register this charge on the title, as they have financed your home and, should you default, this charge gives the lender the right to repossess the house as an asset to sell. Nowadays, the word mortgage and home loan are used to mean the same thing, as its so common to have a home loan against the property.

Profy can assist you in making informed and sound home loan and credit decisions. Contact us today to help you get ahead.