Home Loan Glossary
Whether you are buying your first home or third home, regardless of whether you are an owner occupier or investor, rules and regulations, as well as terminology and expectations are always changing and the last thing you want is to be caught on the back foot because you are unfamiliar with a home loan term or process. Instead use this comprehensive glossary to locate and understand any words or phrases you have come across in your search for a home or a home loan so that you can navigate the process like a professional, giving you an edge over competing buyers and investors.
A
Accrued interest
In relation to a home loan accrued interest is interest that has been incurred on your loan, but is yet to be charged, and in turn paid by you. Since the interest on your home loan is calculated daily but you probably make your payments weekly, fortnightly or monthly from the time you made your last payment, to the time you make your next payment interest is accruing.
Additional securities
Security over your loan is an asset which guarantees your lender a portion of the value of your loan until the loan is repaid in full. Usually the property which you have taken out the loan to buy acts as the security over the loan, however in some cases you may have a guarantor on the loan who puts up their property as security.
Additional repayment
Additional repayments allow you to pay off your loan sooner and any amount you pay above the minimum repayment amount required is an additional repayment. The more you pay in addition to your minimum repayments, the sooner you will repay your loan and in turn the less interest you will pay and you may make additional repayments on an automated basis by paying a larger than required direct payment to your loan each month or you may make additional repayments into your loan when you come across extra funds in your budget.
Adjustments
When you buy an existing property you may have to pay out a portion of council rates all water rates which have already been paid by the previous owner for a time period they are no longer going to be in property and so they want to be reimbursed for these costs. An adjustment is the process of allocating these expenses to be paid from your home loan account.
All in one loan
An all in one loan allows you to use your loan account and savings, cheque and transaction account by having all of your wages and other income paid into your loan account, and giving you access to all of the funds above the value of your minimum home loan repayment amount. An all in one loan is also known as a home equity loan or a transactional loan and because you are leaving all of your savings and everyday funds in your loan account until you need them they work to offset the interest charged on your home loan.
Agent
The agent is the person or company who has been authorised to act on behalf of the customer who is selling their property.
Amenity
This refers to a feature of the home or property which is marketed as a benefit to the buyer. And amenity is an additional feature and not a necessity, it may also be a natural feature such as a park or coastal location, or may be a man-made addition such as a swimming pool or an outdoor entertaining area.
Amortisation period
This is simply a fancy word for what you are going to be doing in repaying your mortgage making the minimum monthly repayments. Amortisation is the practice of repaying a mortgage loan in monthly instalments of principal and interest repayments. These repayments are based on a scheduled term which allow you to own your home at the end of that term, the most common loan period being 30 years.
Application form
You will need to complete an application form as the first part of the loan approval process. On your application form you will need to record information about your personal details, as well as your financial details to help the lender with the underwriting process.
Application fees
Not all loans were charred application fees but some lenders will charge an initial fee for setting up the loan to cover their internal costs.
Appraisal
Gives an estimate of the market value of the property you are looking to finance, and is usually required by the lender during the home loan application process, as well as again before the expiry of the fixed-rate period to assess your loan to value ratio and help determine the applicable variable revert rate.
ASIC
Is the Australian Securities and Investment Commission, who are an independent regulatory government body which monitors the behaviours, processes, terms and conditions, and maintains the transparency of Australian financial institutions to ensure a fair deal for customers.
B
Baycorp advantage
The former name of the Veda Advantage and My Credit File, who holds credit files and the credit histories of all Australians, and the information in your credit file will be used by your lender to help determine whether you are a suitable loan candidate.
Bridging finance
Typically used if you are selling one property and buying another at the same time. Bridging finance offers you a short-term loan to cover the money you need to buy a new home while you are waiting for the proceeds of the sale of your old home, and is usually charged at a higher interest rate than standard home loan.
Building inspection
Ensures that the property you are looking at purchasing is structurally sound and that there are no issues which are going to cause costly repairs in the future. Having issues uncovered in a building inspection can also offer you leverage in negotiating a better price and some contracts of sale can be signed subject to an acceptable building inspection report.
Building regulations
Local councils have control over how the properties in the area look and how they are built and positioned on the land. These controls are building regulations and are in place to ensure public health and safety, acceptable standards for construction and to ensure an aesthetically pleasing area.
Buyers’ agent
Can act on the behalf of the buyer to seek out suitable properties and negotiate with agents or vendors for a suitable price or contract, saving you the time of travelling to dozens of properties which look good on paper but whose listings belie their faults.
C
Capital
Is the value of your long-term assets, if they were to be liquidated at their current value.
Capital gain
Refers to the momentary gain you would obtain when you sold an asset and made a profit as it sells for more than you paid for it originally.
Capital gains tax
Is a Federal tax charged on the momentary gain you make from the sale of an asset, or and sold after September 1985. The home you live in as your primary residence is excluded from capital gains tax when you sell it.
Capitalised interest
Capitalised interest can be best understood on an investment loan where you are making interest only repayments, and you also have a line of credit to access the equity built up in your investment property. Capitalised interest uses your line of credit to pay your interest repayments so your interest repayments are being added to the principal amount of the loan. Capitalised interest relies on you increasing the equity in your investment property through improvements, and then extending your line of credit to continue to repay the interest. This can be a risky long-term strategy because if your loan grows faster than you can add equity to your property and your line of credit then you will fast run out of money.
Capped loan
Has an interest rate which will not exceed a set level for a fixed period of time, but that interest rate will be able to fall like a variable rate and take advantage of drops in the official cash rate, but will not rise exponentially as a standard variable rate can.
Caveat
You may have heard this term before as it is Latin for ‘beware’ and is a warning to public authorities, for examples of titles office, where someone is claiming entitlement to interest in a certain piece of land. The caveat can be registered and remains on file as a warning to uni one who looks at dealing with the property and can prevent any action or changes being made to the property, without first seeking the notice of the person who entered the caveat.
Caveat emptor
Expanding your Latin vocabulary further, this means ‘let the buyer beware’ and that means that you are responsible for doing your due diligence in examining the property before you purchase it for any issues.
Certificate of title
This document has all of the details of the land dimensions, and identifies the ownership of the property. In showing who owns the land to certificate of title also shows you whether there are any mortgages or encumbrances on the property and the CT will usually be held by your lender as security for your loan.
Charge
Describes the fact that you are entering into a debt where your lender secures that debt over your property, and holds you liable to repay it. For example, you are charged with the obligation to repay your loan.
Chattels
Another term for personal property, and there are two types of chattels; real chattels which are buildings and fixtures of the property, and personal chattels which are things like clothing and furniture. Your purchase contract will detail whether real or personal chattels are included in the sale and contract price.
Clear title
This is when there are no restrictions, such as existing mortgages, on the certificate of title which prevent the sale. Clear title also refers to when ownership of the seller is established.
Cluster housing
This is a group of houses which share a common space, such as an apartment block or a series of units. If you are considering purchasing a property which is part of a cluster, be aware that there may be body corporate fees and restrictions on changes and additions you can make to the property.
Collateral security
May be required as additional security over your loan, where the property you are taking out the loan to buy acts as security you may not have sufficient deposit or be an attractive loan candidate, and so your lender will ask for collateral security to further secure your loan, in the form of savings, other investments or properties of a family member who is able to act as guarantor.
Commission
This is the fee paid to any agent for their services. A real estate agent often takes their commission from the deposit paid to secure the property, whereas a buyers’ agent might need to wait until the purchase has been processed, as do mortgage brokers who receive a trailing commission which is a portion of the percentage of interest you are paying, over the life of the loan.
Company title
This is a property title which is applicable when owners in a block of units band together to form a company. A company title allows the individual owners of the individual units to own the title to their property, where previously a single title was held over the entire block of units. Not all units are held in a company title and if it is important to you to hold the title over the property you buy this is something you should check.
Comparison rate
New obligations enforced from July 2003 mean that all lenders must provide a benchmark comparison rate in all of their home loan advertising. The comparison rate is calculated to reflect the total annual cost of your loan including interest payments and fees, expressed as a percentage rate also known as the average annual percentage rate so you have one figure to compare across all loan products.
Compound interest
As interest on your home loan is calculated daily, it compounds to your weekly, fortnightly or monthly repayment. As such you are being charged interest on your interest as well as interest on your principal amount because the daily interest calculations are added to the loan balance on which interest is calculated on the following day and so on.
Consumer credit code
This is an Act of Parliament which governs the relationship between you and your lender. The legislation is in place to protect you by ensuring that Australian financial institutions are follow the same rules whether they are providing personal, domestic or household credit, so that borrowers are provided with complete, straightforward and honest information. One such inclusion is the fact that lenders must include an accurate comparison rate to help you choose the most affordable loan.
Contract of sale
This is a written document, which is legally enforceable and outlines terms and conditions for the purchase or sale of a property. While the contract of sale is legally binding you do not have to sign it unless you are comfortable with the conditions, and you can sign a contract of sale subject to finance being approved for example, subject to completing a building inspection, or subject to you selling your existing property.
Conveyance
This is when the ownership of the property is transferred from the seller’s name, into your name.
Conveyancing
This is the legal process which transfers the ownership of the property, and to make sure you understand the process and that it is completed correctly many property buyers enlist the services of a conveyancer.
COSL
The Credit Ombudsman Service Limited is an external disputes resolution system which will hear your complaint about any business, institution, a broker or agent in the financial services industry, offering you an alternative to legal proceedings to resolve your complaint.
Covenant
This is the terms and conditions which are in place specifying the accepted use of a block of land or property, for example whether you are able to use it properly for just residential purposes or for commercial uses as well.
Cover note
Many home loan applications will not be approved unless you have sufficient insurance on the property you are purchasing. As a result you can take out cover note which acts as temporary insurance while the property is under contract, and before you have secured and organised an official insurance policy.
Credit history
Your credit history includes all credit card applications you have made, any personal loans you have in your name as well as details of your repayment history with regards to your bills and other debts. Your credit history will be assessed by a lender to determine how likely you are to responsibly repay your home loan, however even if you have defaults or a lot of credit card that it is still possible to secure a home loan.
CRAA
CRAA became Credit Advantage Limited, then Baycorp Advantage and is now known as Veda Advantage and My Credit File and if you see your lender use the term CRAA they are referring to the records of your credit information and credit history.
D
Daily interest
Home loans will typically calculate the interest charges on your account daily regardless of whether you make your repayments weekly, fortnightly or monthly. This means that the interest calculations can vary depending on the balance of the account each day.
Debt to income ratio
Your debt to income ratio is calculated by looking at the ratio of the money you make to the money you owe. When you are considered as a home loan candidate the repayment of the debt on your home loan will be considered in this ratio to help the lender decide whether or not you will be overextended, and the lower your debt to income ratio the better.
Deed
The deed is a legal document which shows who has the legal right to possess that property and states whether there are any agreements or obligations on the property.
Default
If you do not pay your minimum home loan repayment by the due date then you will be in default. If you do not make loan repayments and remain in default your lender may take legal action to repossess the property. Defaults can also be listed against your name for failure to pay any bill such as a phone or power bill, and these then show up on your credit history and can impair your credit when it comes time to apply for a loan.
Delinquency
Is when you do not make your mortgage repayments on time, under your loan agreement. If you do not make your repayments then you become at risk of defaulting on your loan due to delinquency.
Deposit
A deposit is normally required when you purchase a property at the time you sign a contract of sale. Your deposit secures your purchase and is usually around 5 to 10% of the total purchase price.
Deposit bond
If at the time of exchanging contracts for the purchase of your new home, you do not have access to funds for a deposit, you can take out a deposit bond which guarantees that you will pay the full deposit by a designated due date. The insurance institution providing your deposit bond acts as guarantor that the payment will be made and you can secure your purchase without having to access funds which may be tied up in other investments or accounts will stop
Depreciation
Over time many assets will lose value as they become older, outdated and less useful, and this is known as depreciation. When it comes to the value of long-term tangible asset is a periodic cost can be assigned to calculate the cost of depreciation to you.
Direct debit
If you choose to pay your home loan repayments with direct debit, then you are a green for your lender to automatically debit payment amount from your chosen cheque or savings account. If you choose to make your payments by direct debit you will need to be very sure that there will always be enough funds available on the day the direct debit comes out so that your account does not become overdrawn.
Disbursements
This is the name given to fees which are often incurred during the conveyancing process of purchasing a new house. These can often include title search fees and costs paid to government authorities and these are often unavoidable, but may be included in the fee you are paying your conveyancer.
Discharge fees
If you finalise your loan account and pay the amount in full before the end of the agreed term you may be charged discharge fees which are administration fees to cover the costs incurred by the lender to process your loan.
Discharge of mortgage
This is a document your lender will sign and give to you when your loan has been repaid in full as confirmation that your loan account has been finalised.
Disposable income
This is the amount you have left over from your wages and other income once all of your bills and expenses have been paid. It does not include any lifestyle or entertainment expenses, but is the amount your lender will look at to determine how much you have remaining from your total income each month, to service a loan.
Down payment
When you purchase an existing home at a private sale, you will usually need to provide a down payment to secure your purchase, until settlement when the purchase price is paid in full. The down payment is not part of your home loan amount, but if the down payment matches the deposit required by your lender, you may not have to pay a separate deposit to your lender for loan approval.
Draw down
When you access funds available on a construction loan or line of credit loan, you are drawing down on those funds. If you want to make a progressive draw down on a construction loan then you will have to apply to your lender, with a copy of an invoice from your builder or contractor. To draw down on a line of credit you can often access the funds independently through internet banking or an ATM.
DSR
Standing for Debt Service Ratio, this is the portion of your income which will go towards servicing your loan for the entire term and you will usually see this expressed as a percentage.
Duty, stamp duty
This is a tax imposed by each individual State Government and as a result the amount differs from state to state. Stamp duty is often tiered on the purchase price and the amount of your loan – that’s right you pay two lots of stamp duty when you a buy a house, once on your purchase and again on your loan application.
E
Early termination payment
The cost of paying out your loan early is called an early termination payment and is the exact amount required to payout your loan.
Electronic Funds Transfer (EFT)
When funds are transferred electronically from one account to another and can allow you to make additional repayments to your loan by making electronic transfers in internet banking.
Encumbrance
Can be anything which is a liability or charge on a property and can include an easement which runs through the property, or a charge stating you may choose to repaint your boundary fence from an approved colour list.
Equity
This is the part of an asset which you own, as your assets minus your liabilities equals your equity. This means you also own the value in your house which is above the amount you own your lender on your mortgage.
Equity loan, equity mortgage
If you have enough equity in your home, you can use this amount to secure a loan. An equity loan allows you to access the previously intangible equity which has built up in your home through your repayments and the increases in property prices. You can use this equity for renovations, investments, holidays or bills.
Escrow
Is when money, property, a deed or bond is put into the care of a third party, and is to be delivered only once specific conditions are fulfilled. When you refinance a mortgage for example, your loan application, title and paperwork may have to go through an escrow agent until your income and details have been verified for approval of the loan.
Establishment fees
Not all lenders charge establishment fees, but those who do will require payment to start the application process, and these fees must be paid before the loan is approve. Therefore, make sure you know what happens to your fees if your loan is denied or you choose not to borrow.
Estate
All of your possessions, property and debts which will be left behind when you die.
Exchange of contracts, exchange
When you legally exchange contracts with the vendor you are purchasing from, to allow formal inquiries to begin, towards the settlement of the sale. This is where you present any conditions to the contract such as signing it subject to finance being approved, and subject to satisfactory building inspection reports.
Exit fee
Is charged by most lenders when you pay out your loan before your term. The highest exit fees are charged on fixed rate loans, and are charged whether you pay out the loan with your own funds, or to refinance.
F
FBAA
The Finance Brokers Association Australia is an industry body for finance mortgage brokers, which aims to enforce a code of practice and industry standards.
Fittings
Are the items which can be removed from a property without causing any structural damage. This covers curtains for example, which may or may not be included in the sale of a property.
Fixed interest
When the interest rate charged on your home loan is fixed. Your rate will not change during the fixed interest rate term of your choosing, often terms of between one year and 10 years are available. While your rate will not go up if the Reserve Bank and your lender raise their rates, you will also not benefit from any rate decreases either. At the end of your fixed rate term, your interest is likely to revert to a variable interest rate.
Fixed rate mortgage
Charges you a fixed rate of interest for a term of your choosing. Where a fixed interest rate is charged on your mortgage, your repayments are guaranteed to remain fixed during this term as well.
Fixtures
Are items which may cause damage the property if they were removed. It is important that fixtures such as carpets, stoves and dishwashers are covered in the contract of sale, and that the vendor agrees to take responsibility and repair any damage caused by the removal of fixtures from the property before settlement.
Flood insurance
Protects you against loss or damage of property during a flood and if the property you are purchasing is located in a floodplain your lender will require you to show proof of flood insurance before they will approve your loan.
Foreclosure
This is the legal process where a mortgaged property is sold to pay off the loan of the borrower who has defaulted.
Freehold
Is when you own the land, and the property on it, and you can do what you like with the land and the property, within local and government guidelines. Freehold gives you complete control and ownership for as long as you like, until you choose to sell. While your land or property is mortgaged it is of course partially owned by your lender, and you want to make sure that if you are choosing a 30 year loan term for example, that at the end of that term, you will have freehold over the property, with no obligations remaining.
G
Gearing
Is borrowing to make an investment, as borrowing to make investments is more tax effective than using your own after tax dollars because all costs involved in margin lending are tax deductible, from your interest to your account fees. Gearing is the ratio of borrowed money, to the amount of your own money you have put into an investment.
Gross income
The income amount due to a person or company before amounts for tax, superannuation or payroll have been deducted. Even though your gross annual income is not your take-home wage, lenders will still generally assess your borrowing capacity by asking for your gross annual income.
Guarantor
Someone who agrees to be responsible for your mortgage debt if you default. If you do not have the required deposit amount, or if you have a poor credit history, you may need a family member to act as your guarantor to secure your home loan. Keep in mind you are asking them to put their own hoe and financial security at risk for you, so make sure you have official payment agreements in place.
H
Holding deposit
Is an amount you pay to a vendor to show them, and other buyers, that you are seriously interested in the property. A holding deposit does not secure the property for you, but is given in good faith for the vendor to start organising the sale. Some vendors will refund the holding deposit when the sale goes through, while others will keep the amount to cover costs such as credit checks and legal fees for the initial proceedings.
Home equity
This is the difference between the value of your home and the amount you still owe on your mortgage, and any other outstanding debts over the property. The amount of equity in your home changes as you make repayments to reduce your mortgage, or as the value of your property fluctuates. As your property appreciates in value your equity increases, but if your property depreciates in value, you could be at risk of negative equity, where you owe more than your property is worth. To avoid this situation, most lenders will ask for a home loan deposit so you can avoid borrowing more than your property is worth, and if you refinance to access your equity you can usually only access 80% of the equity in your home, and 40% on a reverse mortgage if you are retired.
Home equity loan
Provides you with a line of credit up to the value of 80% of the equity available in your home. you can use the equity in your line of credit for other investments or to purchase a second home, or to renovate your existing home. The interest charged on a home equity loan is often higher than a standard variable rate, and the loan requires significant discipline not to overspend because while you do not need to make repayments until you have reached your credit limit, you do not want to be controlled by large mortgage debt.
Home inspection
Will examine a property to determine if it is structurally and mechanically safe. A home inspection can make you aware of any repairs which will be required on the home and this can give you leverage to negotiate a lower purchase price, or inform you of expensive home maintenance ahead.
Home loans
A home loan means you are pledging your home to the lender as security that you will repay your loan amount. Until the loan, plus interest, is repaid in full, your lender holds the title of the property.
Home and contents insurance
An insurance policy which protects you against loss or damage of both your home and all of your possessions, fixtures and fittings. Your home and contents insurance should also protect you against claims of negligence or injury, protecting your liability if someone decides to sue you.
Honeymoon rates
Is a much lower introductory rate offered on a home loan for a period between one month and five years depending on the lender. You could save as much as 2% on your interest rate if you take advantage of a honeymoon offer which may include a fixed lower interest rate, a discounted variable rate, or a capped rate. At the end of the honeymoon period your home loan interest rate will revert to the lender’s standard rate for your type of loan, also be aware you can be charged significant exit fees if you close your loan account during a honeymoon period.
I
Inclusions
Anything which is included in the sale of a property, often fittings which are at the discretion of the vendor to take or leave, such as curtains or light fittings.
Income statement
Is a statement showing your income and your expenditure for a designated period, showing your lender the proportions of your income which go to savings, bills and other debts, and how much disposable income is left to service a loan.
Indemnity
Indemnity insurance is security against any damage or loss, where if compensation is required, indemnity is the amount paid to compensate for a loss.
Index
Lenders use an index to determine when and how to adjust their variable interest rates. The index takes into account their own financial position, their cost of lending, and inflation, the official cash rate and Reserve Bank decisions.
Inflation
Over time the cost of living increases so that the same amount of money is able to buy you less and less. Increases in inflation are caused when there are high volumes of money in circulation and that amount exceeds the goods and services which are available to buy, unnaturally raising demand and therefore decreasing the value of the dollar because you need more money to buy the same items. The Reserve Bank of Australia analyses and adjusts the official cash rate to keep inflation steady at around 2-3% a year.
Instalment
Is the regular payment that you agree to make to your lender to repay your mortgage.
Interest
This is the amount your lender is charging you to let you borrow their money to buy your house. In the case of a savings account, the interest is the return you make on your deposited funds.
Interest only loan
A loan which requires you to pay only the interest portion of your repayments. Interest only loans are targeted primarily at investors because they are able to repay the principal amount of the loan at the end of the term or when they sell the property with a portion of the sale price. In a principal and interest repayment a large portion of the repayment is made up of interest anyway, so making interest only repayments is not usually and effective cost saving tactic, for example, on a $250,000 loan with a 7% interest rate, paying interest only will only save you around $200 a month.
Interest rate
The amount of interest you are charged in a monthly loan repayment, expressed as a percentage.
Internal rate of return
Is calculated to help determine the return on investment you could make. Internal rate of return takes into account the time value of money, by showing the rate of interest at which the present value of future cash flow is equal to the cost of the investment loan, so you can see the point at which your investment turns a profit.
Introductory loan
A loan which offers a reduced interest rate for an introductory period of time. This introductory period, or discounted, or honeymoon period as it is also know, can last for as short as one month, to as long as 5 years, however, the average length of an introductory interest rate is 12 months. At the end of the introductory period, your introductory loan interest rate will generally revert to the standard variable interest rate applicable for your type of loan.
Inventory
The list of items which will be included in a property sale. This could include furniture or any fixtures or fittings the vendor is including the sale price.
Investment property
A property which has been purchased with the sole intention of achieving a return on the investment. Property investors can earn a return on their purchases through rental income, capital gains when their property increases in value, or both. For a property to be deemed an investment, and be eligible for the tax deductions and exemptions, the owner cannot live in the property.
J
Joint and several liability
Applies to loans where there is more than one debtor on the account. If joint and several liability applies, the creditor – your lender – has as many rights of action as there are debtors listed. This means each debtor can be sued individually, as well as jointly until the creditor has obtained their payment. if the creditor receives an unsatisfactory outcome from pursuing one debtor, they are not except from being able to pursue the others.
Joint tenants
When two or more people have an equal holding in a property. In the event of one person’s death, the ownership of the property passes onto their surviving partners. This relates to actual property ownership, and not your status as someone tenanting a rental property.
L
Land tax
Land tax is a State Government charge which is payable on land which is not your primary place of residence. Land used for primary producing, such as a farm, is also exempt. Land tax is levied at midnight on 31 December each year, based on the total taxable value of your land holdings. The calculations and minimum thresholds differ between the states, but three are minimum value exemptions, which also differ from state to state, for example, properties valued under $100,000 in South Australia are exempt from land tax, while properties valued under $250,000 in Victoria are exempt. The value of your property for calculation purposes is based on council valuations conducted every two years.
Legal fee
Can be charged to your throughout the sale or loan application process, by your lawyer or your lender. The fee can cover the lender’s legal costs in having your loan contracts drawn up, as well as the time your own solicitor spent reviewing your property sale or purchase contracts.
Lease
Grants a period of tenancy of a property, and requires specific terms and conditions are met. A lease is different to a rental agreement, in that a lease is binding for both the tenant and the landlord, and both agree to uphold the terms of the lease for the entire agreed period, often six or 12 months. Under a lease agreement tenants are requirement to make rental payments and adhere to the lease conditions. Rental agreements can often be for much shorter periods, often just one or two months, at the end of which the tenant or landlord can choose not to renew the agreement, or changes can be made such as rental increases or conditions.
Liabilities
Include your debts and obligations. Your debts include your mortgage, personal loans, student loans or credit card debts, and your obligations are your outgoing expenses and bills.
Lien
A lien is a legal claim over a property, to hold it as security against a debt or loan. You may put your own property up as security to access equity in your home, or a family member may provide their property as security against your debt as a guarantor.
Line of credit
A very flexible loan arrangement which gives you the ability to draw down on an agreed amount of equity through your loan account. You are not required to pay off your line of credit until you have reached the limit of available credit.
Loan preapproval
When the funds you need to purchase a new home are approved, before you have found the home you want to buy. This allows you to clarify your budget and borrowing capacity, and bid freely at auction or put in an offer on a private sale. Preapproval is often provided in writing and can be valid for up to six months.
LMI
Lender’s mortgage insurance protects your lender if you default on your home loan repayments, they have to sell your home and the sale price does not cover the amount outstanding on your loan. You can often avoid paying lender’s mortgage insurance if you have a loan to value ratio of less than 80%. On non-confirming loans such as low doc loans, you may need to provide more than a 20% deposit to avoid paying LMI. LMI is calculated as a percentage of your loan amount and is usually payable before loan approval.
Loan
Money which you borrow and repay, usually with interest.
Loan fraud
When you purposely provide false or misleading information on your loan application to help you qualify for a larger loan amount than you would normally be eligible for. Loan fraud can result in civil liabilities or criminal penalties.
Loan to value ratio
The ratio of the amount you have borrowed, to the value of the security, where the security is usually the property you have borrowed to buy. To calculate your LVR divide the loan amount by the property’s valuation amount, then multiply your answer by 100, as LVR is expressed as a percentage, and can also be called LTV (loan to value). An 80% loan to value ratio is often the point where lenders will require you to pay lenders mortgage insurance.
Lock in
Allows you to lock in an interest rate which is current at the time of your application, so you can be guaranteed that same rate at the time your loan settles. Since interest rates can fluctuate so often and quite significantly, the interest rate quoted in your application could be different to that offered by the lender at loan settlement weeks later, but for a small fee, you can lock in your rate during the application process.
Low doc loans
Low documentation loans are designed for people who are self employed, and who cannot provide the traditional income documentation required for loan approval. The interest charged on a low doc loan may be higher, but you are able to self certify your income and do not need to show BAS if your LVR is less than 80%. Low doc loans and non-conforming loans do often require that you have mortgage insurance.
Low start loan
Is when your initial repayments are lower, and increase over time to cater to first home buyers entering the loan market, or people who expect their wages to increase in the near future.
Lump sum repayments
Additional repayments you make above the minimum repayment amount required. These can be made whenever you have spare cash and can often be any amount, although some lenders will require a minimum amount for a lump sum repayment, and others will charge you a fee to make a lump sum repayment.
M
Margin
Is the difference between a lender’s advertised interest indicator rate and the rate they actually charge to borrowers.
Margin lending
Is when you borrow money against your existing assets such as cash or shares, to make a new investment.
Maturity
At maturity your debt or investment must be paid in full. In the case of your home loan, the maturity date represents the date when your final repayment is made to your lender and is the last day of your loan term.
Maximum loan amount
Based on your income, expenses, deposit, property price and status – whether you are a couple, or have children – your lender will calculate the maximum amount you are eligible to borrow.
Maximum loan to value ratio
This is the maximum amount you will be able to borrow, usually expressed as a percentage.
Maximum term
The maximum amount of time you have been given to repay your loan. Typical loan terms are 25 or 30 years, however, a maximum term may also refer to a portion within that term, such as the maximum term of a fixed interest rate.
Median
The midpoint in a set of values is different to the average, as average values can be distorted by extreme high or low inclusions. However, a median is the midpoint in a series of values, so if there was 11 values, the 6th value would be the median value. For example in this series of numbers:
1,1,3,4,5,6,7,7,7,7,8
The number 6 is the media value, yet the average is 5.09.
MFAA
The Mortgage and Finance Association of Australia is an industry body which represents mortgage and finance brokers and mortgage managers to help with the development and promotions of the mortgage and finance industries.
Minimum fixed amount
This is the minimum amount which can be borrowed at a fixed interest rate, and each lender and each type of loan will have a differing amount.
Minimum loan amount
The minimum amount which can be borrowed and this is also determined by the lender and the type of loan.
Minimum lump sum payment
If you make an additional lump sum payment to your home loan you may be required to pay a minimum amount.
Minimum redraw amount
When you make additional loan repayments you can access these using the redraw facility, but you may be required to make a redraw of a minimum amount set by your lender.
Minimum repayment
The monthly amount you have agreed to pay in your loan contract to repay your loan within the term.
Monthly fees
Fees charged by your home loan lender to cover the internal costs of maintain your loan. Some basic or standard home loans do not charge ongoing monthly fees.
Mortgage
Is a form of security for a loan, which has usually been taken out over real estate.
Mortgagee
The creditor or lender who is providing the funds in a mortgage agreement.
Mortgage broker
A person or company who processes loans for borrowers, from a number of lenders. A mortgage broker receives a trailing commission which is a portion of the interest you pay on your loan, over the life of your loan in return for referring you to your lender.
Mortgage insurance
You can increase the percentage you are able to borrow from some lenders, up to 97%, if you agree to take out mortgage insurance. Mortgage insurance allows your lender to recoup the outstanding loan amount if you default on your loan, or your debt is transferred to a mortgage insurer. You will need to pay mortgage insurance as a one off lump sum payment at the time of loan settlement, and the amount is calculated based on your loan amount, the property value and the LVR.
Mortgage manager
A mortgage manager can arrange finance for you to purchase your home, but unlike banks, building societies or credit unions, mortgage managers do not source the funds from their base of customer deposits, but instead through securitisation.
Mortgage offset account
A separate savings account opened by the financial institution which holds your home loan account. The interest earned in your offset account is applied to the interest charged on your loan, therefore the most beneficial accounts are 100% offset where all of the interest is saved.
Mortgage originator
Will generate mortgage applications for a mortgage trust and then pool a group of mortgages which can be sold on to investors as an income producing asset. An originator will receive applications for finance, assess the applicant’s credit and monitor the transaction to settlement. A mortgage originator may manage the loan throughout the term, or appoint a mortgage manager.
Mortgage payment
Is paid at regular intervals, to a lender and may be comprised of interest only, or both principal and interest.
Mortgage life insurance
Pays a lump sum in the event you are diagnosed with an eligible life threatening condition, to pay out your loan or make repayments depending on the cover. This is a very limited form of life insurance, and your loan repayments may be able to be covered under your complete life insurance policy, which will also cover your other bills and living expenses.
Mortgage registration fee
A fee charged by the State Government to register your mortgage. Part of the loan application process, and therefore payable before the settlement of your loan.
Mortgagor/mortgager
The borrower in a mortgage agreement.
My Credit File
This is the trading name of Veda Advantage, the company which records credit information for every Australian, and to whom you apply for a copy of your credit file.
N
Negative gearing
When the return from an investment does not cover the costs of maintaining the investment, it is negatively geared. Negative gearing is beneficial for tax purposes as this loss can be claimed as a tax deduction.
Net income
To calculate your net income, deduct all expenses which come out of your gross income before it arrives in your bank account. This includes tax, superannuation contributions, and any mandatory health insurance premiums which come out of your gross income. The remainder is your take home pay, or net income, before depreciation or distribution of earnings – that is, before you have paid any of your own bills. Often when you are considered for a loan, your gross income is used, however this amount can be significantly higher than the income you actually net, and can use to service your loan.
Nonconforming loans
Around 25% of Australians applying for a loan do not meet traditional eligibility criteria, and so to secure finance they use a nonconforming loan, which requires different or less documentation. You may be a nonconforming loan candidate if you are self employed, have a poor credit rating or are a new Australia. In all of these situations you cannot verify your income or savings by traditional means and a nonconforming loan will allow you to self verify your income for loan approval, the result is a loan with a higher interest rate as you are considered a higher risk. Nonconforming finance is also called subprime lending.
O
Offer
A potential buyer indicating their intention to purchase a property will put forth an offer on the property, usually in writing, for the consideration of the vendor.
Offer to purchase
This offer is a legal agreement made by the potential buyer, detailing a specific purchase price for a specific property.
Offset account/mortgage offset account
A savings account held by the same institution which issued your loan, where the interest you earn in your savings account, offset the interest you pay on your mortgage. Where you would ordinarily be taxed on interest earned from a traditional deposit account, a mortgage offset account allows you to offset your tax bill against interest savings made. Some offset accounts will offset at the same rate of interest as your mortgage, where others may be slightly less.
Official cash rate
Is the interest rate set by the Reserve Bank of Australia to influence the general level of interest rates in banking and the economy. When the Reserve Bank makes a change to official interest rates, the change can be seen reflected in variable interest rate loans, personal loans and credit cards within just a few weeks.
Option to buy
More than just an option, this is a legally binding contract which can give you first right of refusal on a property.
Origination
This is the process which involves the preparation of your loan, including submitting and evaluating your loan application, running a credit check on you, verifying your employment details, and completing a valuation of the property.
Origination fee
This can also be called the application fee and covers your lender’s costs to originate the loan.
Overdraft
A limit is determined by your lender, and you are able to exceed your account balance by this limit. Your overdraft is often charged interest and must be repaid but there is no set monthly repayment amount.
Passed in
If the highest bid at an auction fails to meet the vendor’s reserve price, then the property is passed in. When a property is passed in, the auctioneer will ask the vendor what they want to do, and they may choose to negotiate with the highest bidder, or wait and try for a higher bid at another auction. Once the auctioneer passes in a property, the auction is closed, and unless you are the highest bidder, you have lost the first right to negotiate with the vendor.
Portability/portable loan
With a portable loan you can sell your house and move, without having to refinance your loan, savings you potentially thousands of dollars in exit fees and new application fees. To qualify for portability your new loan amount may need to be the same or less than the existing loan, and you may also have to pay your lender a portability fee, however this fee is often much less than the costs to refinance.
Pre-approve
When your lender commits to lending you the amount you require to purchase a new home. your preapproval is often valid for as long as your circumstances continue to meet the requirements.
Prepayment
Is any amount which is paid in addition to the minimum repayment, before the due date. This prepayment goes towards reducing the principal loan amount, and depending on your lender may be subject to a prepayment fee.
Pre-qualify
Your lender gives you information about the exact amount you are able to borrow. This is usually an informal process and does not secure the amount or the application.
Principal
The amount borrowed from a lender. You then pay interest on the principal amount, and you may also be subject to additional account or usage fees.
Principal and interest loan
Where both the principal amount and the interest charges are repaid over the term of your loan.
Private sale or treaty
Is when you sell your property without employing the help of a real estate agent. This will require you to do your own advertising and open inspections, but you can also avoid paying a percentage of your sale price as commission to an agent.
R
Real property
Is a term which refers to land, and any improvements which may or may not have been made. These improvements may be a house or other buildings.
Re-amortise
When your loan balance has changed significantly from the original amount – for example if you have made a lump sum payment, or been paying your loan for some time – you may have your lender recalculate the minimum repayment required to repay the outstanding amount over your loan term.
Redraw facility
When you make additional repayments to your loan above the minimum repayment amount a redraw facility allows you to access those additional amounts at a later date. Your lender will have specific redraw conditions and may require a minimum amount to be redrawn or may charge you a redraw fee.
Redraw fee
Charged by your lender to cover their internal costs when you redraw additional repayments from your loan.
Refinancing
When you replace or extend your existing loan with funds from a new lender, or from the same institution.
Rent purchase
Allows you to lease a home, paying your landlord rent, with the option to buy. When you pay your monthly rent amount, you pay your standard rental payment, plus additional funds which are transferred to a separate account to act as your down payment.
Requisitions on the title
During the settlement period, you or your conveyancer can request additional information about the title of the property from the seller, to make sure there are no restrictions in place.
Reserve price
The minimum amount the vendor is willing to accept when they sell their property at auction. The reserve price may be negotiable directly with the vendor if the reserve is not met during bidding.
Right of way
A general pathway may be part of your property, giving them the right to cross your land.
Rise and fall clause
When you are building a new home, your contract with the builder may have a rise and fall clause which allows them to adjust the cost of building, if the cost for their materials or wages fluctuates.
S
Search
Before you are able to sell your property, your lender and the purchaser will carry out searches before settlement to make sure you are entitled to sell the property and there are no encumbrances on it.
Securitisation
Mortgages produce an income for those who hold them, be it a lender or other investor. Therefore securitisation is the process whereby assets which produce an income stream, such as mortgages, are pooled, and converted into saleable securities for investors, mortgages are packaged into low risk bonds, and then issued to investors.
Security
Security is an asset which guarantees your lender all or part of your loan until the loan is repaid in full. It is usually the property you have borrowed to buy which is the security for the loan.
Service fee
Often charged as a monthly fee to cover the lender’s costs for maintaining your loan account, covering costs such as staff and IT software and hardware.
Settlement date
The agreed date when a new owner finalises payment for and takes possession of a mortgaged item, in this case a block of land or property.
Settlement period
After contracts for sale have been exchanged, but before the settlement date, you have the settlement period to organise your finance and conduct building and pest inspections, and conduct title or survey searches on the advice of your conveyancer. Settlement periods usually last six to eight weeks depending on the state of the sale.
Split loan
A loan which combines two types of loan, a fixed interest rate loan and a variable rate loan. Different rates of interest are paid on each portion of the loan, and each split will also be entitled to different features. For example you may be able to make additional repayments and use a redraw facility on your variable loan portion, where the interest rate and repayments will stay the same for the fixed rate portion. You can also choose the split and allocation of interest rates, for example, 50-50 or 60-40.
Stamp duty
A State Government tax which is charged based on the loan amount you borrow, and again on the purchase price of your property. Each state has different stamp duty calculations.
Standard variable rate
Is the interest rate charged on a lender’s most feature packed loans and allows your interest rate to be cut when official rates fall, but also exposes you to interest rate rises. In exchange for this movability is flexibility of loan features such as redraw, portability, transaction account and offset account.
Strata title
Is a title associated with townhouses and home units, and gives you evidence of ownership of a unit (called a lot) within a strata plan. While you own a small portion of the entire building – your unit – there is also common property which includes external walls, windows, roofs, driveways, foyers, fences lawns and gardens, which are maintained by the strata fees you pay.
Subprime lending
Is the issuing of loans to borrowers who can’t verify their income through traditional means, or have a poor credit history. As subprime borrowers are considered a higher risk, subprime lending, also known as non-conforming lending, comes with higher interest rates.
Survey
A plan showing the boundaries of a property and where buildings are positioned within those boundaries. A survey report is often obtained by your conveyancer during the settlement period to ensure the property you intend to purchase is within its boundaries.
Switching fee
If you choose to change from one loan type to another while retaining the same lender your lender may charge you a switching fee to cover their administration costs to complete this change.
T
Tenants in common
Where two or more people share the holding of a property. This may be an equal or unequal share, however, when one person dies, their share of the property forms part of the estate and does not pass onto the other tenants.
Term
The length of time a home loan will take to be repaid, or a portion of that loan. For example the loan term may be 30 years, but the term of the fixed portion of that loan may be 5 years.
Third party guarantee
When another person, usually a close family member, offers their property as security for your loan.
Title deed
Contains the legal description of a property, and details the ownership of the property.
Title fees
To conduct a title search, transfer ownership of the property, register a new mortgage or discharge an old mortgage on a property, title fees must be paid to the State Titles Office for these services.
Title search
Searches public records to ensure that the seller has the right to sell the property and transfer the ownership.
Torrens title
A single system of land titles which records your ownership of a property and states that you are lawfully entitled to lease it. Before the Torrens title system was first implemented in South Australia in 1858, the old-system title being used depended on being able to prove an unbroken chain of title for a property, however the Torrens title system allows for a central place of registration and once your name is recorded on the title as the owner it is primarily unchallengeable.
Townhouse
Townhouses are usually two storey properties, and registered under a strata title.
Transfer
Is the document you need to register with the Land Titles office to confirm a change of ownership, which has been noted on the Certificate of Title.
U
Unencumbered
A property which is not affected by liabilities, encumbrances or restrictions such as easements on the property, mortgages or leases which can affect your ownership.
Underwriting
Is the process which is conducted when your loan application is analysed, and determines the amount of risk involved in lending to you. underwriting reviews your credit history, and includes a judgement of the property’s value.
Uniform consumer credit code
UCCC legislation ensures uniformity across all credit providers in Australia. This means all loan contracts adhere to a uniform format, and all fees and charges must be set out to the borrower, and the guarantor if applicable, so you can be informed of your liabilities under the loan contract.
V
Valuation
Before approving a new loan or refinance, your lender will require a valuation by a professional property valuer to detail the property’s exact value. A valuation will also often include predictions or details of the area’s current property prices and predicted market movements.
Valuation fee
The fee to cover the cost of a valuation which is requested by your lender. As the borrower you are often required to pay the valuation fee as part of your loan application costs.
Variable interest rate
An interest rate which varies in line with money market rates.
Variation
A change which is made to any part of the loan contract to satisfy your individual lending or application requirements, or to encompass changes or additions to your loan product.
Veda Advantage
The Australian credit reporting agency which holds credit files on every Australian. Veda Advantage Limited was previously Baycorp Advantage, Credit Advantage Limited and CRAA.
Vendor statement
The seller’s solicitor or conveyancer will prepare a statement which is then signed by the seller, and is made available to potential buyers. The vendor’s statement includes details about the property’s title, mortgages on the property, and covenants or easements, zoning and the costs of the property such as the rates. The vendor statement does not cover any information about the condition of the buildings, or whether they comply with building regulations, are structurally sound or are within the property boundaries. The vendor statement is a legal document and if the statement is incorrect or insufficient, the buyer has the right to withdraw from the sale and seek legal action.
Vendor
The person or party who is selling the property.
Z
Zoning
Zoning guidelines are set by the local government authority to outline the permitted uses for the land, and the buildings on that land.
If you have a question or query from A to Z which wasn’t answered here, contact Home Loan Finder now and we will be able to define an answer for you.
Whether you are buying your first home or third home, regardless of whether you are an owner occupier or investor, rules and regulations, as well as terminology and expectations are always changing and the last thing you want is to be caught on the back foot because you are unfamiliar with a home loan term or process. Instead use this comprehensive glossary to locate and understand any words or phrases you have come across in your search for a home or a home loan so that you can navigate the process like a professional, giving you an edge over competing buyers and investors.
A
Accrued interest
In relation to a home loan accrued interest is interest that has been incurred on your loan, but is yet to be charged, and in turn paid by you. Since the interest on your home loan is calculated daily but you probably make your payments weekly, fortnightly or monthly from the time you made your last payment, to the time you make your next payment interest is accruing.
Additional securities
Security over your loan is an asset which guarantees your lender a portion of the value of your loan until the loan is repaid in full. Usually the property which you have taken out the loan to buy acts as the security over the loan, however in some cases you may have a guarantor on the loan who puts up their property as security.
Additional repayment
Additional repayments allow you to pay off your loan sooner and any amount you pay above the minimum repayment amount required is an additional repayment. The more you pay in addition to your minimum repayments, the sooner you will repay your loan and in turn the less interest you will pay and you may make additional repayments on an automated basis by paying a larger than required direct payment to your loan each month or you may make additional repayments into your loan when you come across extra funds in your budget.
Adjustments
When you buy an existing property you may have to pay out a portion of council rates all water rates which have already been paid by the previous owner for a time period they are no longer going to be in property and so they want to be reimbursed for these costs. An adjustment is the process of allocating these expenses to be paid from your home loan account.
All in one loan
An all in one loan allows you to use your loan account and savings, cheque and transaction account by having all of your wages and other income paid into your loan account, and giving you access to all of the funds above the value of your minimum home loan repayment amount. An all in one loan is also known as a home equity loan or a transactional loan and because you are leaving all of your savings and everyday funds in your loan account until you need them they work to offset the interest charged on your home loan.
Agent
The agent is the person or company who has been authorised to act on behalf of the customer who is selling their property.
Amenity
This refers to a feature of the home or property which is marketed as a benefit to the buyer. And amenity is an additional feature and not a necessity, it may also be a natural feature such as a park or coastal location, or may be a man-made addition such as a swimming pool or an outdoor entertaining area.
Amortisation period
This is simply a fancy word for what you are going to be doing in repaying your mortgage making the minimum monthly repayments. Amortisation is the practice of repaying a mortgage loan in monthly instalments of principal and interest repayments. These repayments are based on a scheduled term which allow you to own your home at the end of that term, the most common loan period being 30 years.
Application form
You will need to complete an application form as the first part of the loan approval process. On your application form you will need to record information about your personal details, as well as your financial details to help the lender with the underwriting process.
Application fees
Not all loans were charred application fees but some lenders will charge an initial fee for setting up the loan to cover their internal costs.
Appraisal
Gives an estimate of the market value of the property you are looking to finance, and is usually required by the lender during the home loan application process, as well as again before the expiry of the fixed-rate period to assess your loan to value ratio and help determine the applicable variable revert rate.
ASIC
Is the Australian Securities and Investment Commission, who are an independent regulatory government body which monitors the behaviours, processes, terms and conditions, and maintains the transparency of Australian financial institutions to ensure a fair deal for customers.
B
Baycorp advantage
The former name of the Veda Advantage and My Credit File, who holds credit files and the credit histories of all Australians, and the information in your credit file will be used by your lender to help determine whether you are a suitable loan candidate.
Bridging finance
Typically used if you are selling one property and buying another at the same time. Bridging finance offers you a short-term loan to cover the money you need to buy a new home while you are waiting for the proceeds of the sale of your old home, and is usually charged at a higher interest rate than standard home loan.
Building inspection
Ensures that the property you are looking at purchasing is structurally sound and that there are no issues which are going to cause costly repairs in the future. Having issues uncovered in a building inspection can also offer you leverage in negotiating a better price and some contracts of sale can be signed subject to an acceptable building inspection report.
Building regulations
Local councils have control over how the properties in the area look and how they are built and positioned on the land. These controls are building regulations and are in place to ensure public health and safety, acceptable standards for construction and to ensure an aesthetically pleasing area.
Buyers’ agent
Can act on the behalf of the buyer to seek out suitable properties and negotiate with agents or vendors for a suitable price or contract, saving you the time of travelling to dozens of properties which look good on paper but whose listings belie their faults.
C
Capital
Is the value of your long-term assets, if they were to be liquidated at their current value.
Capital gain
Refers to the momentary gain you would obtain when you sold an asset and made a profit as it sells for more than you paid for it originally.
Capital gains tax
Is a Federal tax charged on the momentary gain you make from the sale of an asset, or and sold after September 1985. The home you live in as your primary residence is excluded from capital gains tax when you sell it.
Capitalised interest
Capitalised interest can be best understood on an investment loan where you are making interest only repayments, and you also have a line of credit to access the equity built up in your investment property. Capitalised interest uses your line of credit to pay your interest repayments so your interest repayments are being added to the principal amount of the loan. Capitalised interest relies on you increasing the equity in your investment property through improvements, and then extending your line of credit to continue to repay the interest. This can be a risky long-term strategy because if your loan grows faster than you can add equity to your property and your line of credit then you will fast run out of money.
Capped loan
Has an interest rate which will not exceed a set level for a fixed period of time, but that interest rate will be able to fall like a variable rate and take advantage of drops in the official cash rate, but will not rise exponentially as a standard variable rate can.
Caveat
You may have heard this term before as it is Latin for ‘beware’ and is a warning to public authorities, for examples of titles office, where someone is claiming entitlement to interest in a certain piece of land. The caveat can be registered and remains on file as a warning to uni one who looks at dealing with the property and can prevent any action or changes being made to the property, without first seeking the notice of the person who entered the caveat.
Caveat emptor
Expanding your Latin vocabulary further, this means ‘let the buyer beware’ and that means that you are responsible for doing your due diligence in examining the property before you purchase it for any issues.
Certificate of title
This document has all of the details of the land dimensions, and identifies the ownership of the property. In showing who owns the land to certificate of title also shows you whether there are any mortgages or encumbrances on the property and the CT will usually be held by your lender as security for your loan.
Charge
Describes the fact that you are entering into a debt where your lender secures that debt over your property, and holds you liable to repay it. For example, you are charged with the obligation to repay your loan.
Chattels
Another term for personal property, and there are two types of chattels; real chattels which are buildings and fixtures of the property, and personal chattels which are things like clothing and furniture. Your purchase contract will detail whether real or personal chattels are included in the sale and contract price.
Clear title
This is when there are no restrictions, such as existing mortgages, on the certificate of title which prevent the sale. Clear title also refers to when ownership of the seller is established.
Cluster housing
This is a group of houses which share a common space, such as an apartment block or a series of units. If you are considering purchasing a property which is part of a cluster, be aware that there may be body corporate fees and restrictions on changes and additions you can make to the property.
Collateral security
May be required as additional security over your loan, where the property you are taking out the loan to buy acts as security you may not have sufficient deposit or be an attractive loan candidate, and so your lender will ask for collateral security to further secure your loan, in the form of savings, other investments or properties of a family member who is able to act as guarantor.
Commission
This is the fee paid to any agent for their services. A real estate agent often takes their commission from the deposit paid to secure the property, whereas a buyers’ agent might need to wait until the purchase has been processed, as do mortgage brokers who receive a trailing commission which is a portion of the percentage of interest you are paying, over the life of the loan.
Company title
This is a property title which is applicable when owners in a block of units band together to form a company. A company title allows the individual owners of the individual units to own the title to their property, where previously a single title was held over the entire block of units. Not all units are held in a company title and if it is important to you to hold the title over the property you buy this is something you should check.
Comparison rate
New obligations enforced from July 2003 mean that all lenders must provide a benchmark comparison rate in all of their home loan advertising. The comparison rate is calculated to reflect the total annual cost of your loan including interest payments and fees, expressed as a percentage rate also known as the average annual percentage rate so you have one figure to compare across all loan products.
Compound interest
As interest on your home loan is calculated daily, it compounds to your weekly, fortnightly or monthly repayment. As such you are being charged interest on your interest as well as interest on your principal amount because the daily interest calculations are added to the loan balance on which interest is calculated on the following day and so on.
Consumer credit code
This is an Act of Parliament which governs the relationship between you and your lender. The legislation is in place to protect you by ensuring that Australian financial institutions are follow the same rules whether they are providing personal, domestic or household credit, so that borrowers are provided with complete, straightforward and honest information. One such inclusion is the fact that lenders must include an accurate comparison rate to help you choose the most affordable loan.
Contract of sale
This is a written document, which is legally enforceable and outlines terms and conditions for the purchase or sale of a property. While the contract of sale is legally binding you do not have to sign it unless you are comfortable with the conditions, and you can sign a contract of sale subject to finance being approved for example, subject to completing a building inspection, or subject to you selling your existing property.
Conveyance
This is when the ownership of the property is transferred from the seller’s name, into your name.
Conveyancing
This is the legal process which transfers the ownership of the property, and to make sure you understand the process and that it is completed correctly many property buyers enlist the services of a conveyancer.
COSL
The Credit Ombudsman Service Limited is an external disputes resolution system which will hear your complaint about any business, institution, a broker or agent in the financial services industry, offering you an alternative to legal proceedings to resolve your complaint.
Covenant
This is the terms and conditions which are in place specifying the accepted use of a block of land or property, for example whether you are able to use it properly for just residential purposes or for commercial uses as well.
Cover note
Many home loan applications will not be approved unless you have sufficient insurance on the property you are purchasing. As a result you can take out cover note which acts as temporary insurance while the property is under contract, and before you have secured and organised an official insurance policy.
Credit history
Your credit history includes all credit card applications you have made, any personal loans you have in your name as well as details of your repayment history with regards to your bills and other debts. Your credit history will be assessed by a lender to determine how likely you are to responsibly repay your home loan, however even if you have defaults or a lot of credit card that it is still possible to secure a home loan.
CRAA
CRAA became Credit Advantage Limited, then Baycorp Advantage and is now known as Veda Advantage and My Credit File and if you see your lender use the term CRAA they are referring to the records of your credit information and credit history.
D
Daily interest
Home loans will typically calculate the interest charges on your account daily regardless of whether you make your repayments weekly, fortnightly or monthly. This means that the interest calculations can vary depending on the balance of the account each day.
Debt to income ratio
Your debt to income ratio is calculated by looking at the ratio of the money you make to the money you owe. When you are considered as a home loan candidate the repayment of the debt on your home loan will be considered in this ratio to help the lender decide whether or not you will be overextended, and the lower your debt to income ratio the better.
Deed
The deed is a legal document which shows who has the legal right to possess that property and states whether there are any agreements or obligations on the property.
Default
If you do not pay your minimum home loan repayment by the due date then you will be in default. If you do not make loan repayments and remain in default your lender may take legal action to repossess the property. Defaults can also be listed against your name for failure to pay any bill such as a phone or power bill, and these then show up on your credit history and can impair your credit when it comes time to apply for a loan.
Delinquency
Is when you do not make your mortgage repayments on time, under your loan agreement. If you do not make your repayments then you become at risk of defaulting on your loan due to delinquency.
Deposit
A deposit is normally required when you purchase a property at the time you sign a contract of sale. Your deposit secures your purchase and is usually around 5 to 10% of the total purchase price.
Deposit bond
If at the time of exchanging contracts for the purchase of your new home, you do not have access to funds for a deposit, you can take out a deposit bond which guarantees that you will pay the full deposit by a designated due date. The insurance institution providing your deposit bond acts as guarantor that the payment will be made and you can secure your purchase without having to access funds which may be tied up in other investments or accounts will stop
Depreciation
Over time many assets will lose value as they become older, outdated and less useful, and this is known as depreciation. When it comes to the value of long-term tangible asset is a periodic cost can be assigned to calculate the cost of depreciation to you.
Direct debit
If you choose to pay your home loan repayments with direct debit, then you are a green for your lender to automatically debit payment amount from your chosen cheque or savings account. If you choose to make your payments by direct debit you will need to be very sure that there will always be enough funds available on the day the direct debit comes out so that your account does not become overdrawn.
Disbursements
This is the name given to fees which are often incurred during the conveyancing process of purchasing a new house. These can often include title search fees and costs paid to government authorities and these are often unavoidable, but may be included in the fee you are paying your conveyancer.
Discharge fees
If you finalise your loan account and pay the amount in full before the end of the agreed term you may be charged discharge fees which are administration fees to cover the costs incurred by the lender to process your loan.
Discharge of mortgage
This is a document your lender will sign and give to you when your loan has been repaid in full as confirmation that your loan account has been finalised.
Disposable income
This is the amount you have left over from your wages and other income once all of your bills and expenses have been paid. It does not include any lifestyle or entertainment expenses, but is the amount your lender will look at to determine how much you have remaining from your total income each month, to service a loan.
Down payment
When you purchase an existing home at a private sale, you will usually need to provide a down payment to secure your purchase, until settlement when the purchase price is paid in full. The down payment is not part of your home loan amount, but if the down payment matches the deposit required by your lender, you may not have to pay a separate deposit to your lender for loan approval.
Draw down
When you access funds available on a construction loan or line of credit loan, you are drawing down on those funds. If you want to make a progressive draw down on a construction loan then you will have to apply to your lender, with a copy of an invoice from your builder or contractor. To draw down on a line of credit you can often access the funds independently through internet banking or an ATM.
DSR
Standing for Debt Service Ratio, this is the portion of your income which will go towards servicing your loan for the entire term and you will usually see this expressed as a percentage.
Duty, stamp duty
This is a tax imposed by each individual State Government and as a result the amount differs from state to state. Stamp duty is often tiered on the purchase price and the amount of your loan – that’s right you pay two lots of stamp duty when you a buy a house, once on your purchase and again on your loan application.
E
Early termination payment
The cost of paying out your loan early is called an early termination payment and is the exact amount required to payout your loan.
Electronic Funds Transfer (EFT)
When funds are transferred electronically from one account to another and can allow you to make additional repayments to your loan by making electronic transfers in internet banking.
Encumbrance
Can be anything which is a liability or charge on a property and can include an easement which runs through the property, or a charge stating you may choose to repaint your boundary fence from an approved colour list.
Equity
This is the part of an asset which you own, as your assets minus your liabilities equals your equity. This means you also own the value in your house which is above the amount you own your lender on your mortgage.
Equity loan, equity mortgage
If you have enough equity in your home, you can use this amount to secure a loan. An equity loan allows you to access the previously intangible equity which has built up in your home through your repayments and the increases in property prices. You can use this equity for renovations, investments, holidays or bills.
Escrow
Is when money, property, a deed or bond is put into the care of a third party, and is to be delivered only once specific conditions are fulfilled. When you refinance a mortgage for example, your loan application, title and paperwork may have to go through an escrow agent until your income and details have been verified for approval of the loan.
Establishment fees
Not all lenders charge establishment fees, but those who do will require payment to start the application process, and these fees must be paid before the loan is approve. Therefore, make sure you know what happens to your fees if your loan is denied or you choose not to borrow.
Estate
All of your possessions, property and debts which will be left behind when you die.
Exchange of contracts, exchange
When you legally exchange contracts with the vendor you are purchasing from, to allow formal inquiries to begin, towards the settlement of the sale. This is where you present any conditions to the contract such as signing it subject to finance being approved, and subject to satisfactory building inspection reports.
Exit fee
Is charged by most lenders when you pay out your loan before your term. The highest exit fees are charged on fixed rate loans, and are charged whether you pay out the loan with your own funds, or to refinance.
F
FBAA
The Finance Brokers Association Australia is an industry body for finance mortgage brokers, which aims to enforce a code of practice and industry standards.
Fittings
Are the items which can be removed from a property without causing any structural damage. This covers curtains for example, which may or may not be included in the sale of a property.
Fixed interest
When the interest rate charged on your home loan is fixed. Your rate will not change during the fixed interest rate term of your choosing, often terms of between one year and 10 years are available. While your rate will not go up if the Reserve Bank and your lender raise their rates, you will also not benefit from any rate decreases either. At the end of your fixed rate term, your interest is likely to revert to a variable interest rate.
Fixed rate mortgage
Charges you a fixed rate of interest for a term of your choosing. Where a fixed interest rate is charged on your mortgage, your repayments are guaranteed to remain fixed during this term as well.
Fixtures
Are items which may cause damage the property if they were removed. It is important that fixtures such as carpets, stoves and dishwashers are covered in the contract of sale, and that the vendor agrees to take responsibility and repair any damage caused by the removal of fixtures from the property before settlement.
Flood insurance
Protects you against loss or damage of property during a flood and if the property you are purchasing is located in a floodplain your lender will require you to show proof of flood insurance before they will approve your loan.
Foreclosure
This is the legal process where a mortgaged property is sold to pay off the loan of the borrower who has defaulted.
Freehold
Is when you own the land, and the property on it, and you can do what you like with the land and the property, within local and government guidelines. Freehold gives you complete control and ownership for as long as you like, until you choose to sell. While your land or property is mortgaged it is of course partially owned by your lender, and you want to make sure that if you are choosing a 30 year loan term for example, that at the end of that term, you will have freehold over the property, with no obligations remaining.
G
Gearing
Is borrowing to make an investment, as borrowing to make investments is more tax effective than using your own after tax dollars because all costs involved in margin lending are tax deductible, from your interest to your account fees. Gearing is the ratio of borrowed money, to the amount of your own money you have put into an investment.
Gross income
The income amount due to a person or company before amounts for tax, superannuation or payroll have been deducted. Even though your gross annual income is not your take-home wage, lenders will still generally assess your borrowing capacity by asking for your gross annual income.
Guarantor
Someone who agrees to be responsible for your mortgage debt if you default. If you do not have the required deposit amount, or if you have a poor credit history, you may need a family member to act as your guarantor to secure your home loan. Keep in mind you are asking them to put their own hoe and financial security at risk for you, so make sure you have official payment agreements in place.
H
Holding deposit
Is an amount you pay to a vendor to show them, and other buyers, that you are seriously interested in the property. A holding deposit does not secure the property for you, but is given in good faith for the vendor to start organising the sale. Some vendors will refund the holding deposit when the sale goes through, while others will keep the amount to cover costs such as credit checks and legal fees for the initial proceedings.
Home equity
This is the difference between the value of your home and the amount you still owe on your mortgage, and any other outstanding debts over the property. The amount of equity in your home changes as you make repayments to reduce your mortgage, or as the value of your property fluctuates. As your property appreciates in value your equity increases, but if your property depreciates in value, you could be at risk of negative equity, where you owe more than your property is worth. To avoid this situation, most lenders will ask for a home loan deposit so you can avoid borrowing more than your property is worth, and if you refinance to access your equity you can usually only access 80% of the equity in your home, and 40% on a reverse mortgage if you are retired.
Home equity loan
Provides you with a line of credit up to the value of 80% of the equity available in your home. you can use the equity in your line of credit for other investments or to purchase a second home, or to renovate your existing home. The interest charged on a home equity loan is often higher than a standard variable rate, and the loan requires significant discipline not to overspend because while you do not need to make repayments until you have reached your credit limit, you do not want to be controlled by large mortgage debt.
Home inspection
Will examine a property to determine if it is structurally and mechanically safe. A home inspection can make you aware of any repairs which will be required on the home and this can give you leverage to negotiate a lower purchase price, or inform you of expensive home maintenance ahead.
Home loans
A home loan means you are pledging your home to the lender as security that you will repay your loan amount. Until the loan, plus interest, is repaid in full, your lender holds the title of the property.
Home and contents insurance
An insurance policy which protects you against loss or damage of both your home and all of your possessions, fixtures and fittings. Your home and contents insurance should also protect you against claims of negligence or injury, protecting your liability if someone decides to sue you.
Honeymoon rates
Is a much lower introductory rate offered on a home loan for a period between one month and five years depending on the lender. You could save as much as 2% on your interest rate if you take advantage of a honeymoon offer which may include a fixed lower interest rate, a discounted variable rate, or a capped rate. At the end of the honeymoon period your home loan interest rate will revert to the lender’s standard rate for your type of loan, also be aware you can be charged significant exit fees if you close your loan account during a honeymoon period.
I
Inclusions
Anything which is included in the sale of a property, often fittings which are at the discretion of the vendor to take or leave, such as curtains or light fittings.
Income statement
Is a statement showing your income and your expenditure for a designated period, showing your lender the proportions of your income which go to savings, bills and other debts, and how much disposable income is left to service a loan.
Indemnity
Indemnity insurance is security against any damage or loss, where if compensation is required, indemnity is the amount paid to compensate for a loss.
Index
Lenders use an index to determine when and how to adjust their variable interest rates. The index takes into account their own financial position, their cost of lending, and inflation, the official cash rate and Reserve Bank decisions.
Inflation
Over time the cost of living increases so that the same amount of money is able to buy you less and less. Increases in inflation are caused when there are high volumes of money in circulation and that amount exceeds the goods and services which are available to buy, unnaturally raising demand and therefore decreasing the value of the dollar because you need more money to buy the same items. The Reserve Bank of Australia analyses and adjusts the official cash rate to keep inflation steady at around 2-3% a year.
Instalment
Is the regular payment that you agree to make to your lender to repay your mortgage.
Interest
This is the amount your lender is charging you to let you borrow their money to buy your house. In the case of a savings account, the interest is the return you make on your deposited funds.
Interest only loan
A loan which requires you to pay only the interest portion of your repayments. Interest only loans are targeted primarily at investors because they are able to repay the principal amount of the loan at the end of the term or when they sell the property with a portion of the sale price. In a principal and interest repayment a large portion of the repayment is made up of interest anyway, so making interest only repayments is not usually and effective cost saving tactic, for example, on a $250,000 loan with a 7% interest rate, paying interest only will only save you around $200 a month.
Interest rate
The amount of interest you are charged in a monthly loan repayment, expressed as a percentage.
Internal rate of return
Is calculated to help determine the return on investment you could make. Internal rate of return takes into account the time value of money, by showing the rate of interest at which the present value of future cash flow is equal to the cost of the investment loan, so you can see the point at which your investment turns a profit.
Introductory loan
A loan which offers a reduced interest rate for an introductory period of time. This introductory period, or discounted, or honeymoon period as it is also know, can last for as short as one month, to as long as 5 years, however, the average length of an introductory interest rate is 12 months. At the end of the introductory period, your introductory loan interest rate will generally revert to the standard variable interest rate applicable for your type of loan.
Inventory
The list of items which will be included in a property sale. This could include furniture or any fixtures or fittings the vendor is including the sale price.
Investment property
A property which has been purchased with the sole intention of achieving a return on the investment. Property investors can earn a return on their purchases through rental income, capital gains when their property increases in value, or both. For a property to be deemed an investment, and be eligible for the tax deductions and exemptions, the owner cannot live in the property.
J
Joint and several liability
Applies to loans where there is more than one debtor on the account. If joint and several liability applies, the creditor – your lender – has as many rights of action as there are debtors listed. This means each debtor can be sued individually, as well as jointly until the creditor has obtained their payment. if the creditor receives an unsatisfactory outcome from pursuing one debtor, they are not except from being able to pursue the others.
Joint tenants
When two or more people have an equal holding in a property. In the event of one person’s death, the ownership of the property passes onto their surviving partners. This relates to actual property ownership, and not your status as someone tenanting a rental property.
L
Land tax
Land tax is a State Government charge which is payable on land which is not your primary place of residence. Land used for primary producing, such as a farm, is also exempt. Land tax is levied at midnight on 31 December each year, based on the total taxable value of your land holdings. The calculations and minimum thresholds differ between the states, but three are minimum value exemptions, which also differ from state to state, for example, properties valued under $100,000 in South Australia are exempt from land tax, while properties valued under $250,000 in Victoria are exempt. The value of your property for calculation purposes is based on council valuations conducted every two years.
Legal fee
Can be charged to your throughout the sale or loan application process, by your lawyer or your lender. The fee can cover the lender’s legal costs in having your loan contracts drawn up, as well as the time your own solicitor spent reviewing your property sale or purchase contracts.
Lease
Grants a period of tenancy of a property, and requires specific terms and conditions are met. A lease is different to a rental agreement, in that a lease is binding for both the tenant and the landlord, and both agree to uphold the terms of the lease for the entire agreed period, often six or 12 months. Under a lease agreement tenants are requirement to make rental payments and adhere to the lease conditions. Rental agreements can often be for much shorter periods, often just one or two months, at the end of which the tenant or landlord can choose not to renew the agreement, or changes can be made such as rental increases or conditions.
Liabilities
Include your debts and obligations. Your debts include your mortgage, personal loans, student loans or credit card debts, and your obligations are your outgoing expenses and bills.
Lien
A lien is a legal claim over a property, to hold it as security against a debt or loan. You may put your own property up as security to access equity in your home, or a family member may provide their property as security against your debt as a guarantor.
Line of credit
A very flexible loan arrangement which gives you the ability to draw down on an agreed amount of equity through your loan account. You are not required to pay off your line of credit until you have reached the limit of available credit.
Loan preapproval
When the funds you need to purchase a new home are approved, before you have found the home you want to buy. This allows you to clarify your budget and borrowing capacity, and bid freely at auction or put in an offer on a private sale. Preapproval is often provided in writing and can be valid for up to six months.
LMI
Lender’s mortgage insurance protects your lender if you default on your home loan repayments, they have to sell your home and the sale price does not cover the amount outstanding on your loan. You can often avoid paying lender’s mortgage insurance if you have a loan to value ratio of less than 80%. On non-confirming loans such as low doc loans, you may need to provide more than a 20% deposit to avoid paying LMI. LMI is calculated as a percentage of your loan amount and is usually payable before loan approval.
Loan
Money which you borrow and repay, usually with interest.
Loan fraud
When you purposely provide false or misleading information on your loan application to help you qualify for a larger loan amount than you would normally be eligible for. Loan fraud can result in civil liabilities or criminal penalties.
Loan to value ratio
The ratio of the amount you have borrowed, to the value of the security, where the security is usually the property you have borrowed to buy. To calculate your LVR divide the loan amount by the property’s valuation amount, then multiply your answer by 100, as LVR is expressed as a percentage, and can also be called LTV (loan to value). An 80% loan to value ratio is often the point where lenders will require you to pay lenders mortgage insurance.
Lock in
Allows you to lock in an interest rate which is current at the time of your application, so you can be guaranteed that same rate at the time your loan settles. Since interest rates can fluctuate so often and quite significantly, the interest rate quoted in your application could be different to that offered by the lender at loan settlement weeks later, but for a small fee, you can lock in your rate during the application process.
Low doc loans
Low documentation loans are designed for people who are self employed, and who cannot provide the traditional income documentation required for loan approval. The interest charged on a low doc loan may be higher, but you are able to self certify your income and do not need to show BAS if your LVR is less than 80%. Low doc loans and non-conforming loans do often require that you have mortgage insurance.
Low start loan
Is when your initial repayments are lower, and increase over time to cater to first home buyers entering the loan market, or people who expect their wages to increase in the near future.
Lump sum repayments
Additional repayments you make above the minimum repayment amount required. These can be made whenever you have spare cash and can often be any amount, although some lenders will require a minimum amount for a lump sum repayment, and others will charge you a fee to make a lump sum repayment.
M
Margin
Is the difference between a lender’s advertised interest indicator rate and the rate they actually charge to borrowers.
Margin lending
Is when you borrow money against your existing assets such as cash or shares, to make a new investment.
Maturity
At maturity your debt or investment must be paid in full. In the case of your home loan, the maturity date represents the date when your final repayment is made to your lender and is the last day of your loan term.
Maximum loan amount
Based on your income, expenses, deposit, property price and status – whether you are a couple, or have children – your lender will calculate the maximum amount you are eligible to borrow.
Maximum loan to value ratio
This is the maximum amount you will be able to borrow, usually expressed as a percentage.
Maximum term
The maximum amount of time you have been given to repay your loan. Typical loan terms are 25 or 30 years, however, a maximum term may also refer to a portion within that term, such as the maximum term of a fixed interest rate.
Median
The midpoint in a set of values is different to the average, as average values can be distorted by extreme high or low inclusions. However, a median is the midpoint in a series of values, so if there was 11 values, the 6th value would be the median value. For example in this series of numbers:
1,1,3,4,5,6,7,7,7,7,8
The number 6 is the media value, yet the average is 5.09.
MFAA
The Mortgage and Finance Association of Australia is an industry body which represents mortgage and finance brokers and mortgage managers to help with the development and promotions of the mortgage and finance industries.
Minimum fixed amount
This is the minimum amount which can be borrowed at a fixed interest rate, and each lender and each type of loan will have a differing amount.
Minimum loan amount
The minimum amount which can be borrowed and this is also determined by the lender and the type of loan.
Minimum lump sum payment
If you make an additional lump sum payment to your home loan you may be required to pay a minimum amount.
Minimum redraw amount
When you make additional loan repayments you can access these using the redraw facility, but you may be required to make a redraw of a minimum amount set by your lender.
Minimum repayment
The monthly amount you have agreed to pay in your loan contract to repay your loan within the term.
Monthly fees
Fees charged by your home loan lender to cover the internal costs of maintain your loan. Some basic or standard home loans do not charge ongoing monthly fees.
Mortgage
Is a form of security for a loan, which has usually been taken out over real estate.
Mortgagee
The creditor or lender who is providing the funds in a mortgage agreement.
Mortgage broker
A person or company who processes loans for borrowers, from a number of lenders. A mortgage broker receives a trailing commission which is a portion of the interest you pay on your loan, over the life of your loan in return for referring you to your lender.
Mortgage insurance
You can increase the percentage you are able to borrow from some lenders, up to 97%, if you agree to take out mortgage insurance. Mortgage insurance allows your lender to recoup the outstanding loan amount if you default on your loan, or your debt is transferred to a mortgage insurer. You will need to pay mortgage insurance as a one off lump sum payment at the time of loan settlement, and the amount is calculated based on your loan amount, the property value and the LVR.
Mortgage manager
A mortgage manager can arrange finance for you to purchase your home, but unlike banks, building societies or credit unions, mortgage managers do not source the funds from their base of customer deposits, but instead through securitisation.
Mortgage offset account
A separate savings account opened by the financial institution which holds your home loan account. The interest earned in your offset account is applied to the interest charged on your loan, therefore the most beneficial accounts are 100% offset where all of the interest is saved.
Mortgage originator
Will generate mortgage applications for a mortgage trust and then pool a group of mortgages which can be sold on to investors as an income producing asset. An originator will receive applications for finance, assess the applicant’s credit and monitor the transaction to settlement. A mortgage originator may manage the loan throughout the term, or appoint a mortgage manager.
Mortgage payment
Is paid at regular intervals, to a lender and may be comprised of interest only, or both principal and interest.
Mortgage life insurance
Pays a lump sum in the event you are diagnosed with an eligible life threatening condition, to pay out your loan or make repayments depending on the cover. This is a very limited form of life insurance, and your loan repayments may be able to be covered under your complete life insurance policy, which will also cover your other bills and living expenses.
Mortgage registration fee
A fee charged by the State Government to register your mortgage. Part of the loan application process, and therefore payable before the settlement of your loan.
Mortgagor/mortgager
The borrower in a mortgage agreement.
My Credit File
This is the trading name of Veda Advantage, the company which records credit information for every Australian, and to whom you apply for a copy of your credit file.
N
Negative gearing
When the return from an investment does not cover the costs of maintaining the investment, it is negatively geared. Negative gearing is beneficial for tax purposes as this loss can be claimed as a tax deduction.
Net income
To calculate your net income, deduct all expenses which come out of your gross income before it arrives in your bank account. This includes tax, superannuation contributions, and any mandatory health insurance premiums which come out of your gross income. The remainder is your take home pay, or net income, before depreciation or distribution of earnings – that is, before you have paid any of your own bills. Often when you are considered for a loan, your gross income is used, however this amount can be significantly higher than the income you actually net, and can use to service your loan.
Nonconforming loans
Around 25% of Australians applying for a loan do not meet traditional eligibility criteria, and so to secure finance they use a nonconforming loan, which requires different or less documentation. You may be a nonconforming loan candidate if you are self employed, have a poor credit rating or are a new Australia. In all of these situations you cannot verify your income or savings by traditional means and a nonconforming loan will allow you to self verify your income for loan approval, the result is a loan with a higher interest rate as you are considered a higher risk. Nonconforming finance is also called subprime lending.
O
Offer
A potential buyer indicating their intention to purchase a property will put forth an offer on the property, usually in writing, for the consideration of the vendor.
Offer to purchase
This offer is a legal agreement made by the potential buyer, detailing a specific purchase price for a specific property.
Offset account/mortgage offset account
A savings account held by the same institution which issued your loan, where the interest you earn in your savings account, offset the interest you pay on your mortgage. Where you would ordinarily be taxed on interest earned from a traditional deposit account, a mortgage offset account allows you to offset your tax bill against interest savings made. Some offset accounts will offset at the same rate of interest as your mortgage, where others may be slightly less.
Official cash rate
Is the interest rate set by the Reserve Bank of Australia to influence the general level of interest rates in banking and the economy. When the Reserve Bank makes a change to official interest rates, the change can be seen reflected in variable interest rate loans, personal loans and credit cards within just a few weeks.
Option to buy
More than just an option, this is a legally binding contract which can give you first right of refusal on a property.
Origination
This is the process which involves the preparation of your loan, including submitting and evaluating your loan application, running a credit check on you, verifying your employment details, and completing a valuation of the property.
Origination fee
This can also be called the application fee and covers your lender’s costs to originate the loan.
Overdraft
A limit is determined by your lender, and you are able to exceed your account balance by this limit. Your overdraft is often charged interest and must be repaid but there is no set monthly repayment amount.
Passed in
If the highest bid at an auction fails to meet the vendor’s reserve price, then the property is passed in. When a property is passed in, the auctioneer will ask the vendor what they want to do, and they may choose to negotiate with the highest bidder, or wait and try for a higher bid at another auction. Once the auctioneer passes in a property, the auction is closed, and unless you are the highest bidder, you have lost the first right to negotiate with the vendor.
Portability/portable loan
With a portable loan you can sell your house and move, without having to refinance your loan, savings you potentially thousands of dollars in exit fees and new application fees. To qualify for portability your new loan amount may need to be the same or less than the existing loan, and you may also have to pay your lender a portability fee, however this fee is often much less than the costs to refinance.
Pre-approve
When your lender commits to lending you the amount you require to purchase a new home. your preapproval is often valid for as long as your circumstances continue to meet the requirements.
Prepayment
Is any amount which is paid in addition to the minimum repayment, before the due date. This prepayment goes towards reducing the principal loan amount, and depending on your lender may be subject to a prepayment fee.
Pre-qualify
Your lender gives you information about the exact amount you are able to borrow. This is usually an informal process and does not secure the amount or the application.
Principal
The amount borrowed from a lender. You then pay interest on the principal amount, and you may also be subject to additional account or usage fees.
Principal and interest loan
Where both the principal amount and the interest charges are repaid over the term of your loan.
Private sale or treaty
Is when you sell your property without employing the help of a real estate agent. This will require you to do your own advertising and open inspections, but you can also avoid paying a percentage of your sale price as commission to an agent.
R
Real property
Is a term which refers to land, and any improvements which may or may not have been made. These improvements may be a house or other buildings.
Re-amortise
When your loan balance has changed significantly from the original amount – for example if you have made a lump sum payment, or been paying your loan for some time – you may have your lender recalculate the minimum repayment required to repay the outstanding amount over your loan term.
Redraw facility
When you make additional repayments to your loan above the minimum repayment amount a redraw facility allows you to access those additional amounts at a later date. Your lender will have specific redraw conditions and may require a minimum amount to be redrawn or may charge you a redraw fee.
Redraw fee
Charged by your lender to cover their internal costs when you redraw additional repayments from your loan.
Refinancing
When you replace or extend your existing loan with funds from a new lender, or from the same institution.
Rent purchase
Allows you to lease a home, paying your landlord rent, with the option to buy. When you pay your monthly rent amount, you pay your standard rental payment, plus additional funds which are transferred to a separate account to act as your down payment.
Requisitions on the title
During the settlement period, you or your conveyancer can request additional information about the title of the property from the seller, to make sure there are no restrictions in place.
Reserve price
The minimum amount the vendor is willing to accept when they sell their property at auction. The reserve price may be negotiable directly with the vendor if the reserve is not met during bidding.
Right of way
A general pathway may be part of your property, giving them the right to cross your land.
Rise and fall clause
When you are building a new home, your contract with the builder may have a rise and fall clause which allows them to adjust the cost of building, if the cost for their materials or wages fluctuates.
S
Search
Before you are able to sell your property, your lender and the purchaser will carry out searches before settlement to make sure you are entitled to sell the property and there are no encumbrances on it.
Securitisation
Mortgages produce an income for those who hold them, be it a lender or other investor. Therefore securitisation is the process whereby assets which produce an income stream, such as mortgages, are pooled, and converted into saleable securities for investors, mortgages are packaged into low risk bonds, and then issued to investors.
Security
Security is an asset which guarantees your lender all or part of your loan until the loan is repaid in full. It is usually the property you have borrowed to buy which is the security for the loan.
Service fee
Often charged as a monthly fee to cover the lender’s costs for maintaining your loan account, covering costs such as staff and IT software and hardware.
Settlement date
The agreed date when a new owner finalises payment for and takes possession of a mortgaged item, in this case a block of land or property.
Settlement period
After contracts for sale have been exchanged, but before the settlement date, you have the settlement period to organise your finance and conduct building and pest inspections, and conduct title or survey searches on the advice of your conveyancer. Settlement periods usually last six to eight weeks depending on the state of the sale.
Split loan
A loan which combines two types of loan, a fixed interest rate loan and a variable rate loan. Different rates of interest are paid on each portion of the loan, and each split will also be entitled to different features. For example you may be able to make additional repayments and use a redraw facility on your variable loan portion, where the interest rate and repayments will stay the same for the fixed rate portion. You can also choose the split and allocation of interest rates, for example, 50-50 or 60-40.
Stamp duty
A State Government tax which is charged based on the loan amount you borrow, and again on the purchase price of your property. Each state has different stamp duty calculations.
Standard variable rate
Is the interest rate charged on a lender’s most feature packed loans and allows your interest rate to be cut when official rates fall, but also exposes you to interest rate rises. In exchange for this movability is flexibility of loan features such as redraw, portability, transaction account and offset account.
Strata title
Is a title associated with townhouses and home units, and gives you evidence of ownership of a unit (called a lot) within a strata plan. While you own a small portion of the entire building – your unit – there is also common property which includes external walls, windows, roofs, driveways, foyers, fences lawns and gardens, which are maintained by the strata fees you pay.
Subprime lending
Is the issuing of loans to borrowers who can’t verify their income through traditional means, or have a poor credit history. As subprime borrowers are considered a higher risk, subprime lending, also known as non-conforming lending, comes with higher interest rates.
Survey
A plan showing the boundaries of a property and where buildings are positioned within those boundaries. A survey report is often obtained by your conveyancer during the settlement period to ensure the property you intend to purchase is within its boundaries.
Switching fee
If you choose to change from one loan type to another while retaining the same lender your lender may charge you a switching fee to cover their administration costs to complete this change.
T
Tenants in common
Where two or more people share the holding of a property. This may be an equal or unequal share, however, when one person dies, their share of the property forms part of the estate and does not pass onto the other tenants.
Term
The length of time a home loan will take to be repaid, or a portion of that loan. For example the loan term may be 30 years, but the term of the fixed portion of that loan may be 5 years.
Third party guarantee
When another person, usually a close family member, offers their property as security for your loan.
Title deed
Contains the legal description of a property, and details the ownership of the property.
Title fees
To conduct a title search, transfer ownership of the property, register a new mortgage or discharge an old mortgage on a property, title fees must be paid to the State Titles Office for these services.
Title search
Searches public records to ensure that the seller has the right to sell the property and transfer the ownership.
Torrens title
A single system of land titles which records your ownership of a property and states that you are lawfully entitled to lease it. Before the Torrens title system was first implemented in South Australia in 1858, the old-system title being used depended on being able to prove an unbroken chain of title for a property, however the Torrens title system allows for a central place of registration and once your name is recorded on the title as the owner it is primarily unchallengeable.
Townhouse
Townhouses are usually two storey properties, and registered under a strata title.
Transfer
Is the document you need to register with the Land Titles office to confirm a change of ownership, which has been noted on the Certificate of Title.
U
Unencumbered
A property which is not affected by liabilities, encumbrances or restrictions such as easements on the property, mortgages or leases which can affect your ownership.
Underwriting
Is the process which is conducted when your loan application is analysed, and determines the amount of risk involved in lending to you. underwriting reviews your credit history, and includes a judgement of the property’s value.
Uniform consumer credit code
UCCC legislation ensures uniformity across all credit providers in Australia. This means all loan contracts adhere to a uniform format, and all fees and charges must be set out to the borrower, and the guarantor if applicable, so you can be informed of your liabilities under the loan contract.
V
Valuation
Before approving a new loan or refinance, your lender will require a valuation by a professional property valuer to detail the property’s exact value. A valuation will also often include predictions or details of the area’s current property prices and predicted market movements.
Valuation fee
The fee to cover the cost of a valuation which is requested by your lender. As the borrower you are often required to pay the valuation fee as part of your loan application costs.
Variable interest rate
An interest rate which varies in line with money market rates.
Variation
A change which is made to any part of the loan contract to satisfy your individual lending or application requirements, or to encompass changes or additions to your loan product.
Veda Advantage
The Australian credit reporting agency which holds credit files on every Australian. Veda Advantage Limited was previously Baycorp Advantage, Credit Advantage Limited and CRAA.
Vendor statement
The seller’s solicitor or conveyancer will prepare a statement which is then signed by the seller, and is made available to potential buyers. The vendor’s statement includes details about the property’s title, mortgages on the property, and covenants or easements, zoning and the costs of the property such as the rates. The vendor statement does not cover any information about the condition of the buildings, or whether they comply with building regulations, are structurally sound or are within the property boundaries. The vendor statement is a legal document and if the statement is incorrect or insufficient, the buyer has the right to withdraw from the sale and seek legal action.
Vendor
The person or party who is selling the property.
Z
Zoning
Zoning guidelines are set by the local government authority to outline the permitted uses for the land, and the buildings on that land.
If you have a question or query from A to Z which wasn’t answered here, contact Home Loan Finder now and we will be able to define an answer for you.
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