A quick guide to understand the terms used in the finance industry.
This is by no means a complete list of terms and acronyms used, but it will give you a good start. If you come across something that is not listed do not hesitate to ask.
Application fee: Also called an establishment fee, it’s paid to set up your loan and usually includes legal fees and valuation charges.
Appreciation: An increase in the value of a property due to changes in market conditions or other causes. The opposite of depreciation.
Arrears: To be behind in a repayment.
Body corporate: An administrative body made up of all the owners within a group of units or apartments of a strata building. The owners elect a committee which handles administration and upkeep of the areas shared by the owners.
Break costs: Also known as economic costs or exit fees. They are charged by an institution to recoup interest lost through a borrower refinancing with another institution or paying their loan out early. Break costs are normally only charged on fixed rate loans, where the amount of interest the institution would receive is easily calculable. It can also be charged well into the variable portion of a honeymoon or introductory rate home loan. Some institutions also charge a flat fee on top of their break cost charge. They may refer to this fee as a ’deferred establishment fee’.
Bridging loan: Finance to buy a new property before an existing property has been sold.
Building insurance: Insurance which covers the cost of rebuilding or repairing a property following structural damage, for example by flood, fire, storm and subsidence.
Certificate of title: The certificate detailing the ownership and land dimensions of a property.
Certificate of currency: A document issued by an Insurance company indicating that a formal policy is currently in place for the insured property.
Company title: A property title that applies when owners of units in an apartment block form a company. Each has shares in the company that owns the land and buildings. The owner of the shares is entitled to exclusive occupation of a flat. However, if you want to alter occupancy in any way, you must have the company’s approval to do so.
Contents insurance: A policy insuring household contents against theft and damage.
Comparison rate: An attempt to express some of the costs of a loan into a single interest rate. These ‘costs’ include the nominal interest rate, some ‘up-front’ fees and on-going charges. It does not include fees and charges based on future events which may not occur e.g. redraw fees, progress payments etc which are not typical of all loans. The aim of the comparison rate is to help consumers make a more informed judgement of the costs of a loan, and in so doing, help them to compare various like loan products and services offered by the various lending institutions.
Contract of sale: A legal document that details the conditions relating to the sale/purchase of the property. This document is legally binding when signed by both the vendor and buyer.
Conveyancer: A person qualified and licensed to handle all documentation for the sale and or purchase of a property.
Conveyancing: The legal process where ownership of a property is transferred from the vendor to the buyer.
Credit History: A record of an individual’s open and fully repaid debts. A credit history helps a lender to determine whether a potential borrower has a history of repaying debts in a timely manner.
Daily interest: A method of calculating interest that takes into account the amount you owe on a day-to-day basis. Interest is charged on the loan amount outstanding each day.
Default: Failure to make mortgage payments on a timely basis or to comply with other requirements of a mortgage.
Deposit: The money you pay on exchange of contracts as part of your initial contribution to the purchase of your home. This could be between 5 and 10% of the purchase price. You could also pay your deposit by way of Deposit Bond.
Disbursements: The various costs your Solicitor or Conveyancer has to pay to other organisations and bodies on your behalf, including, for example, search fees and stamp duty/ land tax. Your Solicitor or Conveyancer will itemise the disbursements on the invoice they send you.
Equity: The difference between the amount you owe on your home loan and the current value of your property.
Exit fee: See break costs.
FHOG - First Home Owner’s Grant: A grant available to Australians who are buying or building their first home, and have not previously owned a home, either jointly, separately or with some other person.
Fixed rate: An interest rate set for an agreed term regardless of any variations in the market. The benefits are that you know exactly how much you will be paying and are not affected by any rate rises during the fixed term.
Gearing: Borrowing to invest. Positive gearing is when you borrow to invest in an income producing asset and the returns (income) from that asset exceed the cost of borrowing leaving the investor with a surplus. Negative gearing is where the return on an investment is less than the interest costs of the loan used to fund the investment. This amount can be claimed as a tax deduction.
Guarantor: A party who agrees to be responsible for the payment of another party’s debts.
Home insurance: A way of referring to both buildings and contents insurance.
Honeymoon rates: Honeymoon rate, or introductory rate, home loans offer a low interest rate for an introductory period, usually the first 1-3 years of the loan. Once the honeymoon or introductory period ends, the interest rate usually reverts to a higher rate. This is often, but not always, the lender’s standard variable rate.
Interest only: This is where you only pay the interest on the loan. It is popular with investment properties for tax benefits.
Life Assurance: A form of insurance by which someone’s life is insured. Life assurance policies can run parallel with a principal and interest home loan, so the loan will be repaid if you die before the end of the term.
Line of Credit: This loan lets you free up the equity you have in your home for other purposes. It provides you with a revolving line of credit through a convenient single account that you can use daily.
LMI – Lenders Mortgage Insurance: Insurance written by an independent mortgage insurance company protecting the mortgage lender against loss incurred by a mortgage default. Usually required for loans with an LVR of 80.01% or higher.
Low Doc Loan: Are a flexible financing solution for self-employed people who have income and assets, but may not have the usual paperwork at the time of application.
LVR – Loan to Value Ratio: The ratio of the amount of your loan to the appraised value. The LVR will affect products available to the borrower and generally, the lower the LVR the more favourable the terms of the products offered by lenders.
Mortgage term: The length of time over which you agree to pay back your mortgage, usually up to a maximum of 30 years.
Negative gearing: See Gearing.
No doc loan: No-document home loan (or no-doc loan for short); applicants simply fill out an application form stating their income and assets.
Off The Plan: When you buy a property from the Plans only and not the finished building. The Purchaser will not be able to inspect the property or see the standard of finishes, the practical layout, the size and dimensions or the outlook. However, the Purchaser may be able to view a display unit and sample finishes.
Offset Account: An account linked to a mortgage account so that the interest earned is applied to reduce the interest on the mortgage.
Pre-Approval: A home loan pre-approval confirms how much you can borrow from your lender. It is conditional upon the property you wish to purchase being acceptable security, and your lender confirming your income and other information provided in your application.
Private treaty: A sale of a property at an advertised price that can be negotiated.
Redraw facility: This allows you to access any additional payments you have made on your mortgage. It is not a feature of all loans and may attract a fee, and also have a limit.
Reverse Mortgage: Is a flexible financing solution for seniors who are retired and are generally aged 60 and over. It allows you to access the equity in your home without limiting your lifestyle. This loan for Seniors enables you to access the equity in your home for such things as home improvements, the purchase of a new car, payment of medical expenses, taking a holiday or simply to supplement your income. A reverse mortgage does not require repayment until the applicant moves out of the home on a permanent basis (e.g. moves into permanent age care or dies).
Settlement: The finalisation of the property purchase where your solicitor/conveyancer and the lending institution exchange money and documents so that you become the legal owner of the property.
Serviceability: The one key aspect that all Lenders look at. They need to know if you can afford to keep up the monthly repayments to your loan. Lenders vary in the way they calculate serviceability, so the amount you can borrow will vary from Lender to Lender.
Stamp Duty: A mortgage may attract government duty depending on the purpose of the loan; this varies from state to state. Contact us to confirm if duty applies to your situation.
Strata title: A strata title is the most common title associated with townhouses and apartments and is proof of ownership of a unit. Individuals each own a portion, known as a ‘lot’. They share common property, which can comprise: external walls, roof, foyers, fences, lawns or a pool. All owners contribute to the maintenance of these facilities.
Utilities: Electricity, gas and phone supplies.
Valuation: A written assessment of how much a property is worth by a registered valuer.
Variable rate: The opposite of fixed rates, variable rates go up and down as interest rates rise and fall.