Key terms

Here at house & home loans we understand that in the loan process, the different terminology can often times become incredibly daunting.  So for your benefit, we’ve tried to write down a list of the most commonly used terms to help with your understanding.

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.

Basic home loans: A simple variable rate home loans which can usually be principle and interest/interest only Most do provide the option of making extra repayments and accessing them through redraw.

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.

Cooling off period: A period of time that allows for finance and building and pest inspections to be carried out.  It allows you to obtain formal loan approval without having to run the risk of exchanging with no financial approval.

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

Discounted variable rate: With some packages, variable interest rate discounts can be applied depending on what you borrow. This may incur an annual or monthly fee but the package offers additional benefits on other financial products such as credit cards, transaction accounts and insurance.

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.

Exchange of contracts: The final step in house purchase, under English law, and occurs after a solicitor has carried out all necessary searches and there is agreement to the contract terms. Once each party has signed the contracts and they have been exchanged, they are binding.

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 Loan: For a period of time, generally 1-5 years, it is possible to have a fixed loan rate on some products. You have the security of knowing what your repayments will be for that given time, even if interest rates rise. It can be helpful for those who like to budget but there may be limitations on making extra repayments. If you break your fixed contract, you may need to pay a break cost fee. You can also lock or secure the fixed rate by paying a rate lock fee.

Gearing:  Borrowing to invest.

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: A repayment option where you pay the interest based on your current balance. This will vary from month to month depending on the balance and the number of days in that month.

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/Equity Loan: An ongoing interest only facility which has a maximum approved limit. With your line of credit you can draw down the funds for any purpose you require and you will only pay interest on the balance you have used.

LMI- Lenders Mortgage Insurance: A premium charged when your LVR is greater than 80% or you have less than 20% deposit. This is a premium designed to protect the banks, not you, in the unlikely event that your property is repossessed if you cannot meet your loan repayments. The higher your LVR the higher the premium is. Each lender charges a different premium.

LVR- Loan to Value Ratio: This is your percentage of loan you have against the value of your property (for example $300,000 loan secured with a $400,000 property is a 75% LVR lend.)

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: 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.

No document 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: A transaction account which is linked to your mortgage. Your repayments will not change but it will help you reduce your loan term and the interest paid. The funds available in your offset account will offset against the interest payable on your 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.

Positive gearing: 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.

Private treaty: A sale of a property at an advertised price that can be negotiated.

Principal and Interest: A repayment option where you pay off some of the principal with each repayment. The more principal paid off each month will reduce your loan term.

Rate lock fee: A fee which will secure your fixed rate.

Redraw: A feature which enables you to access any extra repayment that you have made. Typically a feature in standard variable and basic variable loan products.

Repayment holiday/Pregnancy pause: a facility which allows you to reduce your repayments for a certain time if you need to.

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.

Settlement: The day that you own the property. This is the day the mortgage comes into effect.

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 duty charged by the state government in respect to the value of the property you purchase.

Standard Variable rate: A flexible loan which may vary according to the Reserve Bank cash rates.

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.

Split Facility: this offers the flexibility of having more than one loan type under the same facility. A split loan may be most economical when linked with a package

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.

 

We hope our comprehensive list of finance phrases was useful to you.