In educating yourself about mortgages and finance there are many words
you may not be familiar with. This section is designed to act as a handy
guide to many of the terms you may come across.
| Term |
Definition / Explanation |
| Amortisation |
The method by which a loan amount is paid off in full over a set
period of time using regular repayments that represents both principal
and interest on the loan.
The best example is your standard principal
and interest loan. For any given interest rate if you make your
regular repayment
the loan will be paid off in full over the term of the loan.
You make the same repayment both at the beginning and at the end
of
the loan. If interest rates go up or down your repayment changes
is recalculated up or down so that for the new interest rate
your loan is still paid off with the last repayment.
|
| Application Fee |
A fee paid to a lender to consider a loan application. Generally
these are paid up front and are not refundable. In some cases they
may be refunded if the loan is refused. |
| Arrears |
The amount that is required to be paid to bring a loan back to
its correct amount according to the repayment schedule. It is the
amount of overdue repayments plus any penalties. |
| Assets |
Items of ongoing value that are owned eg property, cash, investments,
personal items. |
| Basis Point |
One hundredth of a percent i.e. 0.01%. For example if the Reserve Bank of Australia raises interest rates by 50 basis points this simply means that official interest rates have gone up 0.5%. |
| Bridging Finance |
A short term loan provided when one property is purchased before
another is sold and there is no intention, or it is not possible,
to keep both properties. |
| Certificate of Title |
A document issued by the government that details the ownership
and dimensions of a particular property including any encumbrances
against it e.g. a registered mortgage such as your home loan. |
| Company Title |
A type of ownership exclusive to units. The block of units is owned
by a company instead of individually. Instead of owning the unit
a buyer purchases particular shares in the company which gives them
the right to occupy that particular unit.
It is important to realise
that with this type of title you have different rights than more
standard ownership types. Other people
within the block of units may have much more control over what
you can do with the unit, and even your ability to resell the
shares. Lenders tend to have more conservative lending guidelines
for company
title or simply will not lend against them at all.
|
| Consumer Credit Code |
A law designed to protect individuals who are borrowing predominantly
for personal or domestic purposes eg buying your own home. In essence
it places an obligation on any lender to ensure that you can afford
to repay any loan given over the agreed term without undue hardship.
In particular the lender must give specific consideration as to your
ability to repay the loan should interest rates rise over time. In
effect this means that any lender will lend you less than if it is
for investment as they have a higher legal duty of care. |
| Conveyancing |
The process whereby ownership of a property is transferred from
the vendors (sellers) name to that of the buyer. |
| Contract of Sale |
A legal contract used in the sale of a property that sets out the
agreed terms and conditions relating to the sale. |
| Credit Limit |
The maximum limit that a lender has agreed to provide to a borrower
for a given loan. |
| Credit Reference Authority (CRA) Report |
A report obtained by a lender from an authorised credit reporting
agency that lists the credit history of the borrower. It will contain
any credit defaults listed by other organisations, including bankruptcy and any
other credit applied for. Generally information remains on this record for 7
years. Written permission to obtain this report is required and is generally
contained in the actual application form. |
| Debt Servicing Ratio (DSR) |
The test applied by lenders to determine the ability of a borrower
to service a loan with their income from all sources given their
expenses. It is generally calculated as a proportion of expenses
to income. Combined with the Loan to Value Ration (LVR) it is used
to determine the maximum amount a lender will loan to any particular
borrower. |
| Default |
Failure to make a loan repayment on the date specified by your
loan. |
| Early Repayment Penalty |
An amount charged by a lender if you repay your loan before a specified
period of time after the commencement of your loan. It is important
to be aware of this fee as it may vary greatly between lenders in
both amount and time it applies. In general it is higher in the initial
few years and is a flat administration fee thereafter. |
| Equity |
The amount of value left in an asset after the lenders interest
has been taken away. In simple terms it is the value of the asset
less any debt (loan) owing. |
| Equity Loan |
See Line of Credit |
| Establishment Fee |
The fee charged by a lender to set up a loan once approved. Many
lenders now charge a deferred establishment fee whereby you are only
charged this fee if you exit the loan in the first few years. This
may vary greatly across lenders and you should be aware of this when
choosing between lenders. |
| Family Pledge |
A loan whereby a family member supports a loan application through
providing a guarantee for either income or equity to enable another
family member to obtain a loan they otherwise would be unable to
obtain (see guarantee). |
| Fixed Interest Rate |
Where you fix the loan for a specific period of time. Generally
this if for between 1 and 5 years, however some lenders offer the
option to fix up to 7, 10, or 15 years. If you pay out your loan
before the fixed interest period has expired there may be sizeable
penalties. |
| Guarantee |
A legally binding promise to meet the obligation of a third party
in the event that the third party defaults on their loan arrangements.
With regards to this type of loan the guarantee may be either in
the form of an income guarantee or an equity guarantee to enable
a third party to obtain approval on a loan they otherwise would not
be eligible for. |
| Guarantor |
The person giving the guarantee. Most lenders will require the
guarantor to obtain independent legal advice and sign a statutory
declaration that they understand the consequences of providing the
guarantee. |
| Honeymoon Rate |
The practice of offering an interest rate substantially below standard
rates for an initial period of time (honeymoon period). Thereafter
you are normally revert to a higher rate and are ineligible, or limited,
to what other professional discounts you may be able to access. There
may also be higher penalties than otherwise would be payable if you
discharge the loan early. |
| Interest Only Loan |
A loan whereby only the interest is paid, no principal. Generally
this is for a fixed period of time before the loan reverts to principal
and interest. In practice the loan can generally be rolled into another
interest only period. Most common with investment loans. |
| Lenders Mortgage Insurance (LMI) |
An insurance taken out by a lender against the borrower to protect
themselves in the event the borrower defaults on the loan. For many
lenders
it is a requirement that they take out
this insurance once the LVR exceeds a particular level depending
on the loan type (generally 60% for Lo-Doc and 80% for normal loans).
It is only payable once off on the establishment of the loan and
is expressed as a percentage of the approved loan amount. Generally
this cost is passed on to the client and may be considerable for
higher LVR’s.
|
| Liabilities |
All loans, debts, or other legally binding financial obligations
an individual may have. This also includes potential liabilities,
for example where the individual has provided a personal guarantee
in support of a third party debt. |
| Line of Credit Loan |
A loan that allows you to withdraw and repay funds at any time
to a approved limit. It can be equated to a credit card that is secured
against your property and as such is at a much lower interest rate. |
| Loan to Value Ratio (LVR) |
The ratio of all loans against a security to the value of the
security. For example $400 000 loan against a $500 000 property
gives an LVR
of
(400 000 / 500 000) x 100 = 80%.
The LVR is extremely important as it will determine the maximum
loan amount, whether mortgage insurance is payable, and may also
affect the interest rate.
|
| Loan Term |
The length of time for which a loan is given and at the end of
which the borrower is required to have repaid the entire loan amount
through either regular repayments or refinancing the loan. |
| Mortgage |
Where security over property is given to secure a loan from another
party. Such security being provided until such time as the loan is
repaid in full. |
| Mortgagee |
The person lending the money against the security property. |
| Mortgagor |
The person granting a mortgage over the security to obtain a loan. |
| Mortgage Stamp Duty |
The government tax payable by the borrower on the mortgage. Cost
varies between States and Territories. A credit may be available
on refinances, but conditions and limitations may apply and vary
between States and Territories. |
| Principal |
The amount still owing on a loan at any given point in time. |
| Principal & Interest Loan |
A loan where the principal and interest are paid off over time
by a regular repayment. The repayment is calculated by amortising
the loan over the loan term for the given interest rate. This is
the most common type of home loan. |
| Redraw Facility |
The facility whereby any additional repayments made to a loan are
available to be taken back out upon request. |
| Refinancing |
The process by which a loan is moved from one lender to another. |
| Security Property |
The particular property being offered as security for a loan. |
| Settlement Date |
The legal completion of the sale or purchase of a property. It
is at this time that actual money is exchanged along with the relevant
property title documents. It is at this time that the ownership of
the property is legally transferred. |
| Strata Title |
A particular type of property title whereby ownership is only granted
over a particular unit or a larger building. |
| Title Search |
A request to the Lands Tiles Office for a copy of details pertaining
to the ownership of a specified property and any listed encumbrances
on the title eg other loans. |
| Torrens Title |
A particular type of property title whereby ownership is granted
over a particular piece of property. The most common form of property
title. |
| Valuation |
In this context it is the value given to a proposed security in
the opinion of a professional valuer. It is this value that the lender
will generally base all their figures upon. |
| Variable Interest Rate |
A loan whereby the interest rate may change over time. Whilst technically
at the discretion of the lender competition usually means that they
primarily move in line with official changes in interest rates by
the Reserve Bank of Australia. |
| Vendor |
The seller of a property. |
| Zoning |
The status applied to a property by Local Government Authorities
that provide a guideline as to the permitted uses of both the land
itself and buildings on it. |
