Home Loan A to Z Glossary
Ever spoken to a mortgage broker or bank employee and wondered what all of that home loan terminology really means?
The following is a glossary of some common terms that you may come across when talking about home loans. Some of them are obvious, others not so much.
This is a guide only, general in nature and not intended to constitute advice. Ok, let's get started...
Asset - Any items of economic value that you own. This can include a house, motor vehicle, superannuation, savings, shares and home contents.
Application fee - Also known as an Establishment Fee. A fee charged by a lender to establish a loan. Sometimes this fee will be waived, and in some cases, includes one free valuation cost.
Approval in Principle - Also known as a Pre-Approval, this is an initial loan approval based on the information provided to the lender before a property to purchase is found. If you're house hunting without a pre-approval, it's a big risk to make an unconditional offer if you find soemthing you love. And vendors are reluctant to agree to an offer with a 'subject to finance' clause. Bottom line, if you're in the market and need to a loan, get a pre-approval ASAP. This approval is sometimes subject to further validation of information provided once a property has been found and is usually subject to a satisfactory valuation of that property. It is can also be subject to lender’s mortgage insurance (LMI) approval (if applicable).
Auction - A public sale of a property to the highest bidder. If you don't have pre-approval, you're taking a risk by bidding.
Body Corporate - This can also be referred to as an Owners Corporation or a Community Corporation. It's a legal entity established to manage a Strata Scheme, which includes managing the building and common property (e.g. elevators or rooftop gardens in apartment buildings) or areas (e.g. shared driveways or private roads). There are usually periodical fees that must be paid.
Borrowing Capacity - The amount of money you can borrow based on your income, liabilities and monthly living expenses. See 'Servicing' for more details.
Break Costs - Also known as Early Repayment Fees or Economic Costs. This is charge or penalty for exiting your fixed rate contract with a lender before the fixed rate period is over. If you are the kind of person who would refinance your loan if a better loan product became available, find out what your break costs would be if you fixed your interest rate.
Bridging Loan - Also known as a Relocation Loan. A loan where you can borrow for a new home before you sell your current home. This is usually a temporary facility.
Capital Growth - When you buy a property and it increases in value over time. Capital growth is the difference between the purchase price and what it is now worth.
Comparison Rate - A rate that includes both the interest rate and most fees and charges payable during the life of the loan, expressed as a single percentage figure. This helps you compare interest rates across various lenders and loans with their fees incorporated into the rate. For example, a bank with a great interest rate but a $2,000 establishment fee might be a worse choice than the bank with a slightly higher intrest rate an $100 upfront fee. It usually covers upfront and ongoing maintenance fees but doesn’t cover costs such as package, offset, redraw or early repayment fees.
Contract of Sale - A written agreement outlining the terms and conditions of a property sale. Once signed this is a legally binding agreement.
Conveyancing - Legal process of transferring ownership of a property from one person or legal entity to another. This is usually undertaken by a solicitor or licensed conveyancer.
Credit Limit - See 'Facility Limit'.
Credit Report - Also known as a credit reference, this is a report prepared by an authorised credit reporting agency that shows the credit history of a borrower. For example, applied for other loans and been rejected? It will be in here. Defaulted on loan or credit card repayments in the past? It will be in here. A lender will use this report as part of their assessment for a home loan approval.
Cross Collateralise - A term used when a loan uses multiple (at least 2) properties to secure a loan. The additional property(s) provides the lender with a lower loan to value ratio (LVR) on the loan. For instance, a loan of $300,000 against Property A valued $350,000 results in a LVR of 85.7%. If we cross collateralise Property B valued at $300,000 (with $100,00 owing), then the prevailing LVR is now 61.5% (total debt divided by total value of securities).
Debt - Money that is owed or due by the customer.
Deposit - Money that you will be contributing from your own funds towards the purchase of your property. In some cases, part or all of this money may need to be genuine savings.
Deposit Bond - Also known as a Deposit Guarantee. A Deposit Bond is a form of guarantee that may be accepted by vendors in lieu of cash when purchasers must pay deposit monies on signing the contract of sale. The purchaser can obtain a deposit bond from a financial or insurance company.
Deposit Guarantee - See Deposit Bond.
Drawdown - The amount of loan funds that are provided at the time of settlement by the lender for the purchase of your property. For example, you may have pre-approval to borrow $600,000, but you find a home for $550,000 and only need to drawdown $450,000 to complete the purchase.
Early Repayment - Fee See Break Costs.
Early Exit Fee - From 1 July 2011, lenders are no longer allowed to charge an Early Exit Fee if you decide to switch your home loan to another lender. Some loans taken out prior to this period may still be liable for early exit fees. Although Early Exit Fees can no longer be charged, lenders can still charge a discharge fee, administration fee and/or legal fees associated with the discharge of your loan. Fixed rate loans can also incur Break Costs.
Economic Costs - See Break Costs.
Establishment Fee - See Application Fee.
Exchange of Contracts - Prior to settlement where the purchaser and vendor enter a binding contract for sale, each party signs a copy of the contract, the purchaser pays the deposit and the parties exchange those contracts with each other.
Equity - The amount of an asset that is owned, that is, the value of the asset less any loans that are against it. For instance, if your home is valued at $400,000 and you owe $300,000 on your loan, then your equity is $100,000.
Facility Limit - Also known as a credit limit. The maximum loan amount that a borrower can access under their home loan contract.
Family Equity - See Family Guarantee.
Family Guarantee - Also known as Family Equity, Family Pledge or Guarantor Home Loans. A family member(s) (the guarantor) allows the equity in their own property to be used as additional security for the borrower’s loan. The idea is to lower the loan to value ratio and avoid paying lender's mortgage insurance. The equity in the guarantor's property is not used as cash to buy a property. The primary security for the mortgage will be the borrower’s property. The lender will also take a mortgage over the guarantor’s property. Some lenders offer limited liability guarantees.
Family Pledge - See Family Guarantee.
First Home Owners Grant - Also known as FHOG. This is a Federal and State Government scheme to assist first home buyers. To see if you qualify and meet your specific state’s conditions visit www.firsthome.gov.au.
Fixed Interest Rate - The interest rate for the duration of the fixed term will not change. This also means that your repayments during the fixed term won’t change either.
Genuine Savings - For most lenders where the borrowing is 80 or 85% of the value of the property or higher, it is a requirement that at least 5% (in some cases 10% for investment property purchases) of the deposit be of genuine savings. This requires applicants to show evidence of regular savings over at least 3 months. This may include a savings pattern over at least 3 months and/or funds that are held for over 3 months in an account or share portfolio. Also loan payments on an existing property, or rental history can be considered. The FHOG and borrowed funds are not considered genuine savings.
Government Charges - A term used to refer to various charges payable to the government as part of a mortgage loan. Examples include stamp duty and transfer and mortgage registration fees.
Guarantee - A promise by a third party to meet a borrower’s obligations if they are unable to pay.
Guarantor (Asset) - A third party who is providing additional security to help a family member buy their own home.
Guarantor (Income) - A third party who is providing additional income to help a family member buy their own home. With Responsible Lending guidelines, this is no longer available with most lenders.
Guarantor Home Loans - See Family Guarantee.
Honeymoon Rate - A low interest rate offered at the start of a loan. At the end of a specified period the interest rate converts a higher rate. Be aware of 2-year fixed interest loan products that offer amazing honeymoon rates for one year!
Interest In Advance Repayments - A repayment option where a borrower pre-pays the following year’s interest in the current year and therefore can claim it back as a deduction in their tax returns in the current year. It is normally offered on Fixed Rate Investment Loans to property investors.
Interest Only Repayments - Loan repayments where you repay the interest only. No principal payments are made for a specified time. This is usually used by investors to maximise their negative gearing benefits. If you plan on keeping the property beyond the interest only period, think carefully about this strategy. Remember, eventually you have to pay back the principal, so your repayments will increase significantly when the interest only period ends. For example if you pay interest only for the first five years of a 30-year loan, you'll be paying the principal back over 25 years instead of 30, therefore increasing your loan repayments.
Introductory Rate - See Honeymoon Rate.
Joint Tenants - Joint Tenancy is the equal holding of property by two or more people. When one party dies, his/her share goes automatically to the surviving party/parties of the property.
Lenders Mortgage Insurance (LMI) - LMI is taken out by the lender to protect itself from default by the borrower. Generally required for home loans with a Loan to Value Ratio (LVR) above 80%. The lender passes on the cost to the borrower in the form of a one-off premium. Usually, some or all of this cost is added to the loan, but it can be paid upfront. The cost of LMI can differ between lenders based on which incurance company they use, and is calculated on an ascending scale depending on the amount of your loan above 80% (up to a maximum of 95%) (if applicable) LVR.
Leveraging - Using an asset, such as property, as security for borrowing.
Liability - Your outstanding debts or debt limits you owe.
Limited Liability Guarantee - A form of guarantee that limits the guarantor’s exposure to a fixed amount against their property. For instance, if a first home buyer couple are purchasing a property valued at $400,000 and are contributing a 5% deposit ($20,000), then their parents can provide a limited guarantee for 15% ($60,000) so the buyers can borrow at an 80% LVR. The first home buyers are borrowing 95% of the property value ($380,000) without incurring an LMI cost.
Loan to Value Ratio (LVR) - This is the ratio of the loan amount to the value of the property expressed as a percentage. For instance, if the loan amount is $300,000 and the value of the property is $400,000, then the LVR is 75%. When the LVR is above 80%, the borrow usually has to pay for lender's mortgage insurance (LMI).
Lump Sum Payment - An extra repayment made to a loan outside the scheduled repayments.
Mortgage - A registered charge over a property giving a mortgagee (i.e. bank or lender) statutory rights to possession, sale and foreclosure on default by the mortgagor (i.e. buyer).
Mortgagor - A person(s) who borrows money from a lender and gives a mortgage over their property as security for the loan.
Mortgagee - A financial institution or individual that lends money to a borrower and takes a mortgage over the property of the mortgagor, borrower or a guarantor as security.
Negative Gearing - Borrowing money to buy an investment asset, such as a property, without receiving enough income from the investment to cover the interest expenses and other costs involved in maintaining it. In Australia, the shortfall between the income earned and the interest due can be deducted from a person’s income tax (this will change if Labor are elected into government in 2019).
Offset Account - A mortgage or home loan offset account is a savings account that is linked to your home loan. The balance in your savings account is used to reduce or offset your home loan balance before interest is charged on your loan. This is in lieu of receiving interest on your savings. For example, if you have a $400,000 loan and $50,000 in your offset account, you will only be charge interest on $350,000 of your home loan.
Owner Occupied - A term implying that you will be residing in the property you are purchasing, as opposed to purchasing a property for investment purposes.
Passed In - A term used to indicate that a property has not been sold at an auction if the bidding doesn’t reach the vendor’s reserve price. However, the final bidder will have first opportunity to negotiate with the vendor. If you have pre-approval, the price is within budget and want to buy the property, make sure you are the final bidder if it is passed in.
Pre-Approval - See Approval in Principle.
Pre-payment - Additional payments made to a loan in addition to the scheduled repayments.
Principal - The actual amount of money that has been borrowed to purchase a property, and is still owing.
Principal and Interest Repayments - A repayment option in which both the amount borrowed (the principal) and the interest accrued on that amount are repaid over an agreed term.
Progress Payment - A payment made to a builder by the bank. Payments are made to the builder at the completion of key stages of the construction (usually 5 to 8 stages).
Rate Lock - A loan option available to borrowers that are taking out a fixed rate loan that enables them to secure the fixed rate they are applying for. A rate lock holds that rate for 3 months even if the rates change. Normally the fixed rate applied to your fixed rate loan is the rate applicable for the term chosen at the time of settlement. A Rate Lock fee is usually charged.
Redraw - A loan feature that allows additional repayments made on a loan (that is, additional repayments to the scheduled repayments) to be accessed or drawn by the borrower at any time. At the same time these additional funds are reducing the loan balance and therefore the accrued interest charged on the loan.
Refinance - Paying off your loan in full and discharging the mortgage over the property and arranging a new loan and mortgage. The new loan is usually with a new lender.
Relocation Loan - See Bridging Loan.
Repayments - The amount that the loan contract specifies must be paid at an agreed frequency (eg. weekly, fortnightly or monthly). For variable rate loans this can change with interest rate changes; as rates increase the amount of repayment can also increase, inversely when rates decrease the loan repayment can also decrease.
Rental Vacancy - This is a numerical value, usually expressed as percentage, that measures investment homes or units that are not occupied. This can be measured on a national, state or suburb level. The lower the percentage the more attractive the location for possible property investment. An increase in vacancy rates in rental property indicates a surplus of housing space.
Rental Yield (Gross) - This is a numerical value, usually expressed as percentage, that measures the income (rental) return you get from an investment property. The rental yield can be expressed as a percentage of the purchase price or a current valuation. The income is usually the gross annual rental income. For example, if a property is rented for $300 per week ($15,600 per year) and the purchase price of your investment property is $300,000, then the rental yield is 5.20% (15,600 / $300,000). Measured over time, falling yields can either mean an oversupply of rental properties and hence falling rents or a rising property market with prices or valuations increasing or both. Increasing yields can either mean a strong rental market with rising rents or a falling property market with decreasing valuations or both.
Security - A security is a trade-able asset of any kind. In respect to home loans, it’s mainly a property. Lenders take a mortgage over the security until a borrower has fulfilled their obligations under the loan agreement and repaid their loan.
Servicing - Also referred to as Borrowing Capacity. In terms of finance, servicing refers to an applicant’s ability to repay a loan. An applicant’s ability to service a loan depends on their income, current debt commitments and living expenses. Also important in determining an applicant’s servicing is the interest rate and term of the loan as well as the ability to meet an increase in repayments due to interest rate rises. Any foreseeable changes in income or expenses will also need to be considered.
Settlement - In respect to a home purchase, this refers to the completion of the Contract of Sale when the balance of the contract price is paid to the vendor and the property is legally transferred to the buyer.
Stamp Duty - This is a government duty paid by a buyer on the transfer of land when a property is sold. The amount of duty varies for each State and Territory in Australia. This can be a significant cost and needs to be taken into consideration when purchasing land or home. There are concessions for first home buyers (conditions apply).
Strata Fees - These are also referred to as strata levies. These are payable (usually quarterly) to the Body Corporate when you purchase a strata titled home or unit.
Strata Title - This involves the subdivision of land and the building on the land into lots and common property. The lots comprise the units or apartments while the common property comprises the land above, below and around the building, as well as common facilities within the building (such as foyers, elevators, stairs, landings, car park, driveways and a range of equipment).
Switching - In respect to home lending, this term usually refers to changing the type or feature of your home loan. For example, switching from a variable to a fixed rate loan or changing your interest payment option from ‘interest only’ to 'principal and interest.’ This type of switch may attract a fee. This term is also more widely used to move your home loan from one lender to another.
Tenants in Common - This is a type of co-ownership where two or more people own distinct interests (which can be equal or unequal) in the same property. When one party dies, their share of the property does not pass to the other owners and is passed on to his/her will.
Term - This refers to the length of the loan. It can be expressed in months or years. For instance a 360 month term or a 30 year term.
Third Party - A person(s) who does not have a direct connection with the home loan. They are not an applicant or borrower to a loan. In most cases they are guarantors. This term may also be used to refer other related parties that are indirectly involved in your home loan such as a broker and solicitor/conveyancer.
Title - This usually refers to Land Title. This is an official record of the ownership of a property. It can also include information about mortgages, covenants, caveats and easements.
Valuation - The value of the property as determined by the lender or an independent valuer.
Variable Interest Rate - The interest rate on this type of loan can move up or down with variations in the market’s interest rates and changes in a lender’s funding costs. These changes in interest rate will change the minimum loan repayments you are expected to make.
Vendor - Person(s) who is selling the property.