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Glossary of Terms

Mortgage Information / Definitions

For those clients not familiar with financial "jargon", understanding brochures and legal documents can be very difficult. To help, we have set out for you many of the common terms and provide a brief explanation.

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Additional Repayments

Extra payments that a borrower makes to reduce his/her loan. Most fixed rate loans allow the borrower to make only limited additional payments.

Aggregator

Umbrella organisation connecting mortgage brokers to banks and other lenders.

Application Fee or Establishment Fee

Fee paid by the borrower for the cost of processing the loan. These fees will vary from lender to lender. Also known as an Establishment fee.

Appreciation

The increase of value of an asset (such as a property) due to market forces.

Arrears

When a payment for a loan is overdue, the loan is “in arrears”.

Asset

Is a possession of monetary value owned by the borrower. To a lender, it is an obligation by a borrower to repay an outstanding loan.

Average Annual Percentage Rate AAPR

An annualised mortgage rate that is made up of the interest rate, fees and charges. It is designed to show the true cost of a loan. Please also see Consumer Comparison Rate.

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Basic Variable Loan

A “no frills” loan. The variable interest rate is usually low, but these types of loans are generally less flexible and have fewer features - for example they may have no redraw facility or the ability to split.

Basis Point

Is a term used to describe movements in interest rates, meaning 1/100th of one percent. ie ten basis points equals 0.10%.

Break Cost

This is the “economic cost” to the borrower if they cut short a fixed rate term. It is charged when the current fixed rate is higher than the market rate. It may be charged in addition to a Deferred Establishment Fee or Early Repayment Penalty if a loan is paid out within the first few years.

Bridging Finance

Short term loan covering the time between purchasing a new property and selling a current one. Also called Relocation Loan or In-Between Loan.

Broker

Brokers are either a company or an individual who does not lend money themselves but organises the loans through larger lenders. A broker facilitates the transaction between two parties for a fee. This is usually in the form of a commission payable by the lender, not a payment by the borrower (see Brokerage below).

Brokerage

Fee payable by a borrower to a broker for services rendered in arranging a loan. This is separate from and not to be confused with an Application fee to a lender.

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Cash-out Refinance

When a borrower wants to refinance their loan for a higher amount and wants to pull the money out for unspecified purposes.

Certificate of title

A document which states who a property is owned by as well as the property dimensions.

Co-borrower

An additional individual on a loan.

Construction Loan

This is usually a short term loan, where installments are paid to the builder at certain intervals by the lender to pay for the construction of a building.

Consumer Comparison Rate

Introduced in July 2003, when advertising lenders were required to advertise the comparison rate. The comparison rate is designed to reflect the true cost of a loan. It should include all fees which are ascertainable as at settlement.

Consumer Credit Code

The Act of parliament that governs lenders and protects borrowers when they are borrowing money for personal use.

Consumer Reporting Agency

An agency which runs credit checks on borrowers. These reports reveal all current credit agreements and also if a potential borrower has had defaults in their past credit history. Service currently provided by Baycorp Advantage.

Conveyancing

Cost of legal fees on a purchase which are incurred when the ownership of a property passes from the seller to the buyer. The amount will vary from state to state and on the complexity of the transaction.

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Daily Interest Calculation

Interest on all loan/mortgage accounts is calculated daily. Usually, it is charged to the account monthly. This is the main reason why weekly or fortnightly payments reduce a borrower’s interest costs.

Default

When a borrower has failed to pay a payment on time. See also “arrears”.

Dependent

A person who is financially reliant on another. If a spouse is not co-applicant for a loan and they do not earn an income, they need to be counted as a dependent.

Depreciation

The amount by which an asset has lost value. Often claimed as a non-cash expense in financial statements and tax returns.

Disbursements

Are the costs that are incurred by external parties such as Solicitors and the State Government when finalising a loan. These are passed back to the borrower.

Debt to Service Ratio (DSR)

This is a percentage figure that is used to assess the serviceability of a borrower. It is calculated using the borrower’s income over the committed payments to the loan. An acceptable level is usually around 30%.

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Encumbrance

Mortgages, leases or restrictions etc, that affect or limit the free title of a property.

Establishment Fee

See application fee

Exchange Contracts

Part of the conveyancing process where the buyer signs a contract to purchase, and the vendor signs a contract to sell, a property at an agreed price, with settlement due on a fixed date.

Exit Fee/ Discharge/ Early repayment

Is a fee charged if a loan is refinanced within the first few years. The amount will vary from lender to lender.

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First Home Owners Grant (FHOG)

Began on the 1 July 2000. It is a Commonwealth/State initiative designed to assist first home owners with the purchase or construction of their first home. It is currently set at $7,000.

Fixed Rate

Is when a borrower secures a particular interest rate for a set period of time (i.e. 6 months – 10 years). People tend to fix when they think an interest rate rise is eminent.

Flexible repayments

Relates to loans with a variable rate and allows the borrower to change the frequency (i.e. monthly, fortnightly or weekly) and the amount of the repayments.

Fortnightly repayments

The advantage of fortnightly payments is that they are calculated on 26 payments per year, thus in effect the borrower is paying 13 monthly payments a year, thus paying off their loan faster.

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Gearing

Ratio of the borrower’s loan to the value of their security.

Guarantor

Is a person who guarantees to pay another person’s debt if they fail to do so.

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Home Equity Loan / Line of Credit/ Revolving Line of Credit

See Line of Credit

Honeymoon Rate/ Introductory Rate

A short term discount of a lender’s variable rate that usually lasts 6 months – 2 years.

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Interest Only

A period of time usually 1-5 years where the borrower agrees with the lender to pay only the interest on the loan and for the agreed period. Investors tend to use this method when they are negatively gearing.

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Joint tenants

Two or more people who equally own property. If one person dies the property is passed to the next.

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Legal Fees

Charged for the preparation of lender’s documentation – it may be included in the application fee.

Lenders Mortgage Insurance (LMI)

It is insurance which is taken out with an independent mortgage insurance company protecting the lender against loss if a mortgage is to go into arrears.

Line of Credit

A flexible loan account under which a borrower’s balance is permitted to vary, day to day, without any limitation except the (upper) credit limit. Operates in the same way as a credit card account.

Lo-Doc Loan (No- Doc loan)

A loan aimed at self employed people (although they are not exclusively for self employed people), which does not require full financials. It usually has a higher interest rate.

LVR

Loan to Valuation Ratio. i.e. if a person wants to borrow $100,000 for a home purchase of $150,000, the LVR is 67%. This is a term used to describe the maximum amount that a lender will lend against the value of a property.

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Mortgage

Is the legal agreement between the borrower and the lender that states that the property is security to the lender for the borrower’s debt.

Mortgagor

Borrower who has signed the mortgage stating that they will repay the debt

Mortgagee

The lender i.e. bank

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Non-conforming loans

Are loans that don’t meet the lenders normal lending criteria. For example, people who have been self employed for a short time or have a poor credit history. The borrower can usually expect to pay a higher interest rate on these loans because of the higher risk.

Non-Regulated Loan

A loan that is predominately for business or investment purposes. The borrower will not enjoy the protection of the Uniform Consumer Credit Code.

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Official Cash Rate

Is set by the Reserve Bank of Australia and is used to benchmark the general level of interest rates. A change in the rate has a flow on effect to loans with variable rates, either increasing or decreasing them.

Offset Accounts

Deposit accounts that reduce the interest on a home loan. For example, if a borrower has a loan for $250,000 and a savings account of $20,000 then they only pay interest on $230,000. Offset accounts are tax effective because no interest is paid on the deposit account; rather, interest is saved on the mortgage account. 100% offset accounts provide a total offset (as in the example above).

Originator

Provides a range of home loans funded by a wholesale securitiser. Their role includes credit functions and post settlement functions such as collecting arrears (as opposed to a broker).

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Portable Loans

If a borrower has the option of a portable loan it means that if they sell their house and buy a new one they do not need to refinance, thus saving on legal fees.

Principal

The capital that the borrower originally borrows, not including the interest.

Principal and Interest (P&I)

This is when the principal and interest are being repaid at the same time.

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Redraw

Allows the borrower to take back additional repayments they have made to their mortgage. However, the borrower should be aware that there may be minimum redraw amounts and fees.

Refinancing

To review and replace an existing loan with a new one.

Regulated Loan

A loan that is predominantly for personal or domestic purposes – i.e. an owner occupied property – regulated by The Uniform Consumer Credit Code.

Roll Rate

The rate a product would revert to after the initial rate i.e. intro or fixed has expired (this is usually the standard variable rate and is indicative only).

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Security

An asset supplied as a guarantee, usually the property that is being purchased.

Serviceability Ratio

Another form of test used by a lender to determine a borrower’s capacity to service a loan. See also DSR.

Settlement Date

The date that the borrower has to pay for their new property in full and ownership of the property is transferred.

Split Loans

When you break your loan into different portions for example you may have one portion/split which is set at a fixed rate whilst another is set at a variable rate.

Stamp Duty

Stamp duty is the state government tax which is payable when a property is sold and is paid by the buyer. Each state and territory has a different rate.

Standard Variable Rate

A rate that varies in accordance with floating rates in the marketplace. Is the loan rate usually quoted by the bank.

Strata Title

Defines the ownership rights in respect of a unit, townhouse or similar, with shared walls etc.

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Tenants-in-common

An interest in a property by two or more people. Upon one’s death there is no right of survivorship, as opposed to Joint tenants.

Third party lending

Occurs where there are title holders who have to be included in the loan, despite them gaining no advantage from the loan.

Title

Evidence of ownership on land.

Title Search

Document issued by Land Titles Office to confirm ownership details of a property, together with any encumbrances. (mortgages, caveats, liens, rights of way etc.)

Torrens Title

Freehold type ownership, usually associated with houses or vacant land. Please refer to certificate of title.

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Uniform Consumer Credit Code (UCCC)

Legislation which ensures “truth in lending” and uniformity amongst all credit providers in the setting out of fees and charges that the borrower or guarantor may be liable for. Also covers procedures for recovery/foreclosure of loans in default.

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Valuation

A report done by a valuer to ascertain the value of the borrower’s property. Where this is instructed by a lender, the borrower generally has no rights of access to it or any other benefit from it.

Vendor

Person who offers property of sale.