Lingo of home loans

It pays to get to grips with financial terms and their meaning, writes Sophie Elsworth

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.

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).

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.”

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 actually 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. “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.