Finance and Lending Jargon – Terminology.
Below is a reference for some of the terminology you may encounter when applying for a home loan. (This information is intended as a guide only, terminology will often vary between lenders and between States. You should always seek professional advice if you are applying for a loan and are unsure of some of the terminology used).
This is the Average Annual percentage Rate and describes the “true rate” of a loan. It is used to work out the real cost of a loan as it considers ongoing fees, discharge fees. The advertised interest rate and so on. The fees would be outlined in the Consumer Credit Code.
Is the amount of interest that has already occurred, but has not yet been paid by the borrower and not yet received by the lender.
Extra or lump sum repayments made in addition to your regular periodic repayments. Some types of loan products do not allow you to make additional repayments, or place limits on the repayment amount.
On Business Loans – it relates to the process of apportioning expenses (eg cost of utilities, council rates) on day of settlement day that a seller has paid for but not used. The buyer has not used but should expect to be billed for this.
A fee charged by the lender to process your loan application. Some lenders may waive or reduce this fee for certain products. Also known as an establishment fee or approval fee.
There is an index known as the Housing Affordability Index. This is the ratio of average household disposable income to the income required to meet payments of a typical dwelling. The higher the number, the more affordable the property is.
This could be a person or an organisation which has the authority to act on a client’s behalf in the selling or purchase of a property.
This is a legal contract outlining terms and conditions of an agreement, loan, lease or any purchase agreement.
All in one Loan
This type of loan allows you to deposit all income into this account and then allows you to withdraw money. If spare funds stay in such an account longer, the interest savings are greater.
This is a plot of land that is created out of a much larger area of land.
Sometimes called the loan term. It is the agreed length of time the borrower has to repay the loan and is agreed to at the time of application and approval.
Annual Percentage Rate
This is the advertised rate of interest per annum.
This is the estimated value of a property that will be used as security for a loan.
When you are overdue for a loan payment. When applying for a loan, the lender will want to know if you have ever been in arrears on your other loans.
Your assets are what you own. When applying for a loan, lenders will want to know about your assets such as real estate, bank accounts, shares, motor vehicles etc.
This type of account allows money to be withdrawn immediately.
A public sale of property with the highest bidder granted ownership. There is normally a reserve price set prior to the auction.
This is a statement outlining the financial status of a company. It shows the assets, liabilities, equities and so on for a company at a given time.
It is a legally declared inability or impairment of ability of an individual or organization to pay its creditors.
A variable home loan where the interest rate is lower than standard products as it has “fewer frills”.
Bill of Sale
An agreement in writing in which ownership is transferred but the original owner is permitted to retain possession.
A legal entity comprising of owners and strata managers to manage the building and all common areas.
Fees or penalties charged by a lender when a customer decides to end or “break” from a fixed interest rate before the end of the agreed fixed term.
A short term loan (often no longer than 12 months) designed to allow you to finance the purchase of a new property before you have sold your existing property.
An inspection carried out prior to purchasing a property, generally by a qualified builder, to check for any defects or problems in the structure. The sale contract can be made subject to a building inspection, allowing the purchaser to pull out of the contract if problems are found, or negotiate a new price.
Building Society Institutions
Operating like Banks these institutions can provide loans, take deposits. Customers are termed as members.
This is the value of assets such as a business, property, house etc.
When interest payable is accrued and added to the total debt payable rather than being paid as it is charged.
When an asset is sold for more than its original price, this is the monetary gain.
Capital Gains Tax
This is a federal tax payable on profits made from the sale of a variety of assets (including investment properties). Assets purchased prior to 1985 are exempt. Your principal place of residence (where you live), providing it has never been rented out or used for business purposes, is also exempt.
Capped Rate Loan
A loan where the interest rate is guaranteed not to rise above a certain percentage (the cap), but may fall in the event of a rate drop. The capped rate period is normally 6 or 12 months.
A form of a contract clause lodged on land or property title that denotes that another party who is not the owner, has claimed some rights or interest on that property.
This is a Latin word meaning ” Let the buyer beware”. Under this doctrine, it was hard for the buyer to recover from the seller for defects on the property.
Certificate of Title
A document showing amongst other things the ownership of a property and whether there are any mortgages on it.
This relates to the frequency at which interest is added to the loan balance and can differ from the frequency at which it is calculated. On some loans, interest is calculated daily but charged monthly.
These are items of personal property such as appliances and clothing. In real estate terms, chattels are movable items included in the sale of a property such as, furniture.
Means Comparative Market Analysis. Real estate agents are required to provide this when pricing a property. They are required to compare like sales of at least three properties of the same standard or condition, sold within a five-kilometre radius in the last six months. If the CMA is not provided then the agent should provide written substantiation of the advice.
See Split Loans
Payment for selling a product. Real Estate agents receive a commission from the vendor when they sell a property, while Mortgage Brokers receive a commission from a lender when they sell a home loan product.
Areas that do not belong to an individual and are subject to use by many. It is owned by the tenants in common.
Company title and strata title are forms of title applicable to home units and apartments. Under company title, a private company owns the land and buildings. The buyer purchases shares in the company that entitles them to exclusive possession of a particular unit or apartment in the block.
Comparison rates are similar to interest rates, but give the consumer a better indication of the true cost of a loan. Comparison rates take into account not only the interest rate for the loan but also other fees and charges incurred during the life of the loan, such as ongoing monthly account fees and application fees. For example, a loan may be advertised with an interest rate of 6.3% and a comparison rate of 7.6%. Note that not all fees and charges are included in comparison rates (i.e. stamp duty is not included, and fees that are only incurred in certain circumstances such as redraw fees are not included).
A loan that caters to people building or renovating. The loan amount is generally drawn down progressively as various stages of construction are completed and builders invoices are received. A valuation of the work may be required at each progress-stage.
Consumer Credit Code
Also known as the Uniform Consumer Credit Code (UCCC) is the legislation that regulates credit provided to personal customers and strata corporations that are intended wholly or predominantly for personal or household use.
Any legally enforceable agreement existing between individuals or other entities.
Contract of Sale
The agreement between the vendor and the buyer outlining the terms and conditions for the sale of a property. The contract will include the purchase price and any conditions such as “subject to building inspection” and “subject to finance”.
The process is generally undertaken by a solicitor or conveyancing specialist of transferring property ownership. Conveyancing costs including legal fees, title transfer fees and stamp duty all need to be considered when you are applying for a home loan.
This stands for Credit Ombudsman Service Limited. It is an independent dispute resolution scheme.
Formal or binding restrictions. If any of these are breached in a loan document, then it constitutes a default.
Temporary property insurance cover used to protect a property prior to taking out a formal insurance policy. Cover notes are often taken out while a property is under contract, and a formal policy is taken out when the property settles.
This is money borrowed that needs to be paid back to the lender
When you apply for a loan the lender will check your credit history, including any previous loans and credit cards you have applied for, any history of bad-debt or bankruptcy etc. They may also ask other questions such as whether you have been in arrears on other loans or whether you have ever exceeded your credit card limit.
The maximum amount a borrower can use at any time.
Lenders take into account a person’s credit rating when assessing a loan application. Credit ratings are provided by a specialist agency that examines a person’s financial history and whether debt obligations are met. The top rank is AAA, the bottom is a D.
Type of lending institutions originating from co-operative groups sharing a common bond. They offer savings and loans accounts.
A party to whom money is owed.
Certificate of Title
Interested calculated on a daily basis.
An entry to charge a withdrawal to a specified account
A person who owes money to another. In financial terms, it is the party who has obtained money from a lender. Also known as the borrower
A legal document stating an agreement or obligation relating to a property.
This is the failure of a borrower to meet the conditions of a mortgage agreement (usually the inability to meet the minimum loan repayments). If the borrower defaults on their loan, the lender may take possession of the property and sell it to cover the outstanding loan amount.
The rate a loan rolls/moves automatically at the end of any fixed period.
Deferred Establishment Fee
This is an establishment fee that is only payable when a loan is repaid within the first few years (typically 3 to 5 years) of the loan period.
A deposit is usually required when you are taking out a home loan. Generally, a minimum deposit of 20% is required, or if mortgage insurance is taken out you may only need a 5% deposit. Some lenders offer no deposit home loans if you have proven cash flow, although these products may come at a higher interest rate.
When a mortgage has been repaid in full. The borrower will receive a discharge document from the lender stating that the mortgage has been repaid.
A fee charged by the lender to cover the administration costs of finalising and discharging a mortgage.
A reduced interest rate offered usually for the first year of the loan, after which the loan will revert to a standard rate. Also known as an introductory rate.
Any money left over after all expenses have been paid (eg mortgage repayments, bills and so on)
A share of profits that is paid by a publicly listed company to a shareholder. Dividends are one of the income sources you will be asked about when applying for a home loan.
To access available loan funds, especially referring to lines of credit where the limit is et and funds can be used as required.
Debt to Service Ratio. This is a figure that lenders use to determine your ability to repay your loan. Lenders use a variety of formulas to arrive at a DSR figure, but it is basically a percentage of your income that will be used to service all of your loan debts. As a general rule, most lenders will allow a DSR of between 30% and 35%.
Early Termination Charges
The costs a borrower pays when the loan is paid out early.
A right to use a corridor or passage of land that belongs to another.
Also referred to as bridging finance. It is a short term loan that covers a financial gap between the purchase of a new property and the sale of an old property.
With regards to property, a borrower’s equity is the price the property could be sold for less any amount still owed on the mortgage. As the borrower pays off the loan principal, equity in the property will increase. Rising house values will also increase equity.
A loan where you borrow against the value of your house (potentially up to 90% of the value of your house, less any outstanding loan amounts on the property), and the funds are then available for any personal use, similar to a personal loan but at a lower interest rate. Lenders will often also describe a line of credit loans as equity loans.
A loan secured by the part of the value of an asset (usually a house) owned by the borrower.
A fee charged by the lender to process your loan application. Some lenders may waive or reduce this fee for certain products. Also known as an application fee or approval fee.
Exchange of Contract
In law, it is the point in time when the buyer and the seller exchange documents and commence the process with a view to settlement.
What you spend, including loan repayments, credit card repayments, rent, insurance etc. Lenders will need to know your monthly expenditure when you are applying for a loan.
Features (of a Loan)
Features of a loan and may include terms such as redraw facility, portability etc.
First Home Owners Grant
A Federal Government subsidy which first homeowners may be eligible to receive. Also known as the FHOG. The funds received from the FHOG can be included in the settlement of your loan.
Foreign Investment Review Board
Financial Transactions Reports Act
A loan where the interest rate is fixed for a set period, ranging from 1 to 15 years. This means your loan interest rate won’t fluctuate as it does with a variable loan. Generally, the longer you want to fix your loan, the higher the interest rate will be i.e. you may be able to fix your loan for 1 year at 6.5%, or for 5 years at 7.7%.
Complete ownership of a property and the land that it is built upon.
The ratio of money & funds borrowed funs in an investment. If the property is highly geared then it has a high ratio of borrowed funds compared to ownership.
A person who guarantees to pay out a loan for you in the event you are not able to make the repayments yourself. A lender may require someone (i.e. a family member) to guarantee your loan if you would not be eligible for the loan in normal circumstances.
A refundable deposit based on the goodwill of the buyer to go ahead with the purchase.
What you earn, including your salary or wages, overtime payments, interest and dividends, rental income etc. Lenders will need to know your income when you apply for a loan.
A regular repayment that the borrower makes to pay off a home loan. These repayments will typically be made at monthly, fortnightly or weekly intervals.
Interest in Advance Payments
Payments made to cover upcoming interest charges, usually on an investment home loan with interest-only repayments.
When additional repayments are made on a fixed loan, an interest adjustment cost is sometimes charged to compensate the lender for loss of interest revenue.
Payments made on a loan which only cover interest charges i.e. no payments are made to reduce the principal loan amount. This is generally only used for investment loans, and the period of interest-only payments is usually set from 1 to 5 years.
This is the rate (as a percentage) at which you will be charged interest on your home loan. Interest rates vary between lenders and between various types of loans. Interest rates change reasonably frequently (due to competition between the lenders and the policies of the Reserve Bank of Australia), which in turn changes your repayment amount. Most lenders offer loan products allowing you to set a fixed interest rate if you desire.
A reduced interest rate offered usually for the first year of the loan, after which the loan will revert to a standard rate. Also known as a discount rate.
A loan taken out for the purpose of buying an investment property. Investment loans often have features which you would not normally use on an owner-occupied home loan, such as making interest-only payments or paying interest in advance.
Any property purchased for the sole purpose of earning a return on the investment, either in the form of rent or capital gain.
A form of property ownership where the interest is equal between all parties. The right of survivorship is a feature of joint tenancy, meaning that an interest passes automatically to the surviving party upon death.
Lenders Mortgage Insurance (LMI)
This is insurance that protects the lender if the borrower defaults on the loan. It is required for loans the lender may consider risky. For example, when the amount to be borrowed is over 80% of the property value. This form of insurance provides no protection to the borrower.
Your liabilities are your debts, or what you owe. When applying for a loan, lenders will want to know about your liabilities such as existing home loans, personal loans, hire purchases, credit card limits etc.
Line of Credit Loan
A line of credit loan allows you to borrow funds (usually up to 80% of the value of your house) and use those funds for any personal use. Repayments are usually very flexible, meaning you can make repayments whenever you like and for any amount, providing you stay within your credit limit. The loan is usually ongoing, with no fixed term.
Loan Administration Fee
A monthly fee charged by the lender for maintaining and administering your loan. Most lenders have a variety of loan products, some with monthly fees and some without. Also known as a loan maintenance fee or an ongoing monthly fee.
Loan Approval Fee
A fee charged by the lender to process your loan application. Some lenders may waive or reduce this fee for certain products. Can also be known as an application fee or establishment fee.
Loan Comparison System
A software program to help work out and compare the true cost of different loans on offer by various lenders.
Loan Maintenance Fee
A monthly fee charged by the lender for maintaining and administering your loan. Most lenders have a variety of loan products, some with monthly fees and some without. Also known as a loan administration fee or an ongoing monthly fee.
Low Doc Loan
Low Doc Loans are offered by some lenders to people who lack the normal income statements or tax records to prove their income. Low doc loans may be of use to people who are self-employed or who have irregular cash flow. The lender will still require proof that the loan can be serviced.
Loan to value ratio. This is one of the figures used by lenders when appraising a loan application. It is calculated by expressing the loan amount as a percentage of the property value. For example, for a loan application of $240000 on a property worth $300000, the LVR would be 80%. As a guide, most lenders will lend amounts up to 80% LVR, or higher with mortgage insurance – these figures will vary between lenders and between loan products.
The date the debt needs to be paid in full.
Maximum Loan Amount
The maximum loan value which can be borrowed & is based on a disposable borrower’s income, deposit & purchase price of the property.
Minimum Loan Amount
The minimum loan value that one can borrow.
An agreement between a borrower and a lender, with the borrower providing security (i.e. property) for a loan from the lender. If the borrower can not honour the mortgage agreement (i.e. can’t meet the loan repayments), the lender may sell the security property to recover their costs.
A lender of money, with the loan secured by the borrowers (mortgagors) property as agreed to in a mortgage document.
Someone who borrows money from a lending institution (the mortgagee) and provides property as security for the loan, as agreed to in a mortgage document.
Also known as mortgage introducers, these are persons who match prospective borrowers with a panel of lenders. In all cases, the service is to offer a service that provides the best loan for the consumer.
Mortgage Discharge Fee
Lenders will charge this administration fee to cover the costs associated with the termination of a loan.
Mortgage Insurance, or Lenders Mortgage Insurance, protects the lender against potential losses should you default on your home loan, and the proceeds from the sale of the property not cover the remaining loan amount. A lender will often require you to take out Mortgage Insurance if you wish to borrow more than 80% of the value of the property. It is usually a one-off fee payable when the loan settles.
Mortgage Offset Account
Many lenders now offer mortgage offset facility with some of their loan products. This allows you to offset the funds you have in a transaction (savings) account against your home loan, thereby reducing the interest you will pay on the loan i.e. if your loan amount is $220000, and you currently have $8000 in your savings account, you will only pay interest on $212000.
These are companies that write and process loans with money usually obtained for a pool of funds. They are at the consumer end of the securitisation process.
Mortgage Protection Insurance
This is insurance taken out by a borrower to ensure they have sufficient funds to meet their repayments in the event of sickness or loss of job (through redundancy). Can also be known as income insurance. If considering Mortgage Protection Insurance you should seek professional financial advice from your accountant or a financial planner.
Mortgage Registration Fee
This is a fee charged to register your mortgage with the State Government. Fees will vary from state to state. The fee will be part of the upfront settlement costs of your loan (along with stamp duty, transfer fees etc).
Mortgage Stamp Duty
This is a State Government tax placed on the dollar value of a mortgage.
Negative gearing occurs when you borrow for investment purposes (i.e. to purchase an investment property), and the costs of the investment (such as interest charges) exceed the returns from the investment (i.e. rental income). The loss may then be claimed as a tax deduction, depending on the circumstances of the investment – if considering negative gearing, ensure you seek financial advice first.
No Deposit Home Loan
Some lenders offer no deposit home loans, allowing you to borrow 100% (and sometimes more) of the property value. With this type of loan, you will usually require a very clean credit history and proof of good income and the ability to service the loan. The interest rate for this type of loan may also be higher than for a standard loan.
No Doc Loan
Similar to a low doc loan, but you require no proof of income. Instead, you will be required to sign an agreement certifying that you will be able to service the loan. With this type of loan, you may only be able to borrow a smaller percentage of the property value (i.e. 65% as opposed to 80%).
Loans where the standard loan criteria (proof of employment, proof of income etc) are not met. Low doc and no doc loans can be described as non-conforming loans.
Net Service Ratio
A saving account linked to the home loan that allows the interest earned on the savings is applied to reduce the interest on the loan. An offset can be 100% where interest rates earned & paid are the same. A partial offset is then only a portion of the rate paid on the loan.
Ongoing Monthly Fee
A monthly fee charged by the lender for maintaining and administering your loan. Most lenders have a variety of loan products, some with monthly fees and some without. Also known as a loan maintenance fee or a loan administration fee.
Option to Buy
A legal document which gives the right to buy within a specific time frame at a specific price. There is a cost associated with this.
A pre-arranged limit to which a person can exceed an account balance.
A loan that allows you to take your mortgage with you from one property to the next without having to go through the full approval process. You also avoid some of the fees associated with setting up a loan.
Getting your finance approved by a lender before you have made an offer on a property, or even before you have begun looking for a property. This allows you to look for properties safe in the knowledge that you can get finance for the pre-approved amount, providing your circumstances have not changed and the property meets the lenders’ requirements. Pre-approval may last up to 3 months, and can also be known as approval in principle.
The amount borrowed from a lender, upon which interest is charged. As loan repayments are made the principal decreases.
These are drawdowns on your construction loan made when payments to your builder are due. As construction proceeds, your builder will require payment when certain stages are met, at which time you draw down a portion of your loan until construction is finished and the final drawdown occurs.
This facility is found on many loan products and allows you to redraw funds from your loan that you have paid in advance. For instance, if you have been making extra repayments on your loan and are $10000 in advance with your repayments, with a redraw facility you would be able to take the $10000 (or a portion of it) out of your home loan. Restrictions usually apply (i.e. there may be a minimum amount you are allowed to redraw), and you may be charged a fee for redrawing.
When a mortgage is taken out and some or all of the funds are used to pay off another existing mortgage. The new mortgage may or may not be with the same lender. Refinancing is often used to access the built-up of equity in a property, or simply to move to a cheaper home loan.
This is the frequency with which you make your loan repayments. You will have a choice of making weekly, fortnightly or monthly repayments, depending on the lender and the loan product.
Reverse Mortgage Loan
These loans are aimed specifically at seniors. They allow the borrower to take out a mortgage against their property (usually only up to a comparatively small LVR, such as 25% or less), and not make any repayments until the property is sold, or the borrowers move from the home, or the borrowers are deceased.
When applying for a home loan, assets will be required to secure the loan. On most standard home loans, the security will be the property being purchased. In some circumstances, more than one property may be required to secure the loan.
This is the date on which you receive the funds from your loan. If you are purchasing a property (as opposed to refinancing), this is the date at which you will pay the vendor and take possession of the property. Payments of fees such as stamp duty and mortgage registration are also required on the settlement date.
Some lenders allow you to split your loan into a fixed interest rate component and a variable interest rate component, giving the borrower a combination of the security of a fixed loan and the flexibility of a variable loan.
Stamp Duty Concessions
Stamp duty concessions (waivers or discounts) are available in certain circumstances (i.e. for first home buyers). The amount of the concession will vary from State to State.
Stamp Duty on Loan
This is a State Government tax paid on the loan amount. It will vary from State to State and may be discounted in certain circumstances (i.e. for first home buyers).
Stamp Duty on Property
This is a State Government tax paid on the value of the property. It will vary from State to State and may be discounted in certain circumstances (i.e. for first home buyers).
A plan of a property, showing the precise positioning of the property boundaries and any building on the land. A surveyor can use the plan to check the boundaries of a property prior to purchase.
The duration of a loan. For a home loan, a term of 25 or 30 years is fairly standard. Loan terms will also often be referred to as a number of months i.e. a 30-year loan can be expressed as 360 months.
This is a search of the State Government’s Titles database that is undertaken by the legal representative of a borrower purchasing a property. The search will provide details of who owns the property, as well as who has an interest in the property (i.e. any lender who holds a mortgage over the property).
Title Transfer Fee
This is a State fee charged when you purchase a property and covers the transfer of the title deed for that property.
Uncommitted Monthly Income
The net income that is available once all monthly expenses are deducted. Monthly expenses may include home loan repayments, personal loan repayments, credit card repayments and any other payments or general living expenses. Most lenders will require that you have a certain level of uncommitted monthly income before they offer you a loan.
The various fees and charges you will need to pay when your loan settles, including stamp duty, legal fees, mortgage registration fees etc.
A report that outlines the value of a property and how the figure was reached. When purchasing a property, the lender will require a valuation from a certified valuer before approving the loan. The borrower is responsible for paying the valuation fee, even if the loan does not proceed.
Variable Rate Loan
A loan where the interest rate varies with fluctuations in the mortgage market and changes in official interest rates by the Reserve Bank of Australia. As the interest rate changes, so do your minimum repayment obligations.