HOME LOAN GLOSSARY
| Term | Description |
|---|---|
A |
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| Amortisation | The process by which the value of something is reduced over time. Amortisation is often used to describe the outstanding balance of a loan that reduces over time according to scheduled repayments. |
| Annual Percentage Rate (APR) | The annual cost of a loan to a borrower, including fees, expressed as a percentage of the loan amount. This provides a more accurate reflection of the loan’s cost than the interest rate alone. |
| Application Fee / Establishment Fee | A fee charged to cover or partially cover a lender’s internal costs of considering and processing a loan application. This fee sometimes needs to be paid upfront, but is generally paid from the loan funds at settlement. The fee is generally not refundable unless the loan is refused. |
| Appraisal | An assessment of a property’s value, conducted by a professional appraiser. |
| Arrears | A payment which is overdue, that is, it has not been made by the due date. |
| Assets | What an individual currently owns, such as real estate, savings accounts, cars, home contents, superannuation and shares. |
| Auction | The public sale of a property where would-be buyers compete to buy the property, with ownership going to the highest bidder, subject to agreement by the seller. |
| Australian Business Number (ABN) | A unique identifying number for all businesses in Australia. |
| Australian Tax Return | Anyone earning income in Australia must lodge a tax return by the end of October for the previous tax year. Residents must pay tax on all income earned worldwide. Non-residents for tax purposes must only pay tax on Australian-sourced income, but at higher tax rates. |
B |
|
| Balance Sheet | A financial statement that outlines the assets, liabilities and owner equity position of a business. Also known as a ‘Statement of Financial Position’. |
| Bankruptcy | Formal legal proceedings instigated to relieve a party unable to pay their debts of unpaid liabilities. |
| Basic Variable Rate Loan | A loan with an interest rate that varies according to market forces. The interest rate charged is lower than a standard variable rate loan, but the loan may have fewer features. |
| Best Interests Duty | A mortgage broker’s obligation to provide the best available advice to their customers. |
| Borrowing Power | The amount of money the lender is willing to let an individual borrow. It’s impacted by income currency, deposit size, and credit score. |
| Break Costs | Costs incurred when a fixed rate loan is paid off before the end of the fixed rate period, or when additional payments are made in advance. These are also sometimes called early exit fees. |
| Bridging Finance | Temporary finance to ‘bridge’ the gap between the time money needs to be paid out and money being received comes in. Typically used where a borrower wants to purchase a new property before selling their existing property. |
| Building and Pest Inspection | A process where experts, for a fee, determine the condition of a property before purchase to alert the buyer of any flaws. |
| Buyer’s Agent | A valuable member of the buyer’s team, they are individuals or a company working with the home buyer to locate and purchase a suitable property. They attend open houses and negotiate on the buyer’s behalf. |
C |
|
| Capital Gain | The monetary gain obtained when you sell an asset for more than you paid for it. Such gains may be taxable. |
| Capital Gains Tax (CGT) | A federal tax charged on monetary gains from the sale of an asset. |
| Capital Loss | If a property makes a loss (sells for less than the total expenses), then it’s called a capital loss. Individuals must report a capital loss on their tax return to deduct the expenses from their taxable income. |
| Capitalised Interest | The unpaid interest on a mortgage that is added to the principal. The process is also referred to as capitalisation. |
| Cashflow Forecast | A financial forecast that details the expected monetary inflows and outgoings of a business over a certain period. |
| Cashflow Statement | A financial statement that summarises money coming in and going out over a specific past period. |
| Caveat | An interest lodged on a Certificate of Title, usually in relation to a monetary amount owing by the owner of the property. |
| Certificate of Title (C/T) | A certified document that outlines ownership of a property. It also details land dimensions and any encumbrances, including caveats. |
| Code of Banking Practice | A code that outlines appropriate conduct and regulations pertaining to the banking industry. |
| Collateral | An item of value that a lender accepts as security for a loan. This means the lender can seize the asset if the borrower fails to repay the loan according to the agreed terms. |
| Common Law | Where a legal outcome is decided primarily based on the principles of fairness and equity, in the absence of a specific written law. |
| Community Title | A property title where several dwellings are erected on an estate and the owners own their property and land on freehold title but have shared access to community facilities (such as a swimming pool, barbecue area, tennis court). All property owners pay levies for the upkeep of the community facilities. Community title laws differ between states. |
| Company Title | A type of building ownership where individuals buy shares in a company that owns the building and grants them the rights to occupy a specific unit. Many lenders aren’t keen on company title properties. |
| Comparison Rate | This is a rate that includes both the actual interest rate and the upfront and ongoing loan fees, expressed as a single percentage. For home loans, the comparison rate is currently based on a $150,000 loan over a 25-year term. Under the National Consumer Credit Protection Act 2009, comparison rates must be displayed when a regulated loan’s interest rate is advertised. |
| Conditional Approval | Before offering formal approval, the lender will review an individual’s application and offer a preliminary ‘yes’. This isn’t a guarantee of formal loan approval. They can still reject the application later in the process. |
| Conditions Precedent | Conditions that must be achieved before a loan or formal loan approval can be provided. |
| Construction Loan | A loan specifically for the purpose of funding the building of a new dwelling. Can also apply to major renovations of an existing property. |
| Construction | Refers to building on vacant land, a house and land package or property additions or major renovations. |
| Contract of Sale (COS) | A written agreement outlining the terms and conditions of the sale. |
| Conveyancing | Process of transferring ownership of a property from one party to another. |
| Cooling-off Period | A requirement in most states, the cooling-off period is between two to five days after the sale contract is exchanged in which the buyer can back out of the agreement without penalties. |
| Counter-offer | A response from the seller to the buyer’s initial offer, proposing different terms or conditions. This can then set off a round of counter offers from both parties. |
| Covenant | A binding condition placed on the property title that provides specific restrictions in relation to the property. |
| Credit Limit | The maximum amount of funds that can be advanced to the borrower. |
| Credit Reference | Credit referencing allows lenders to obtain credit history information on parties seeking finance. Credit referencing institutions hold both individual and business credit history information. |
| Credit Report | A report compiled by a credit reporting agency (e.g. Experian, Equifax, illion) which typically provides a credit score and the details of an individual’s credit information in the following areas:
|
| Credit Score | A numerical expression based on an analysis of a person’s credit files, representing the creditworthiness of that individual. Lenders use credit scores to evaluate the risk of lending money to consumers and to mitigate losses due to bad debt. |
| Creditor | A party to whom money is owed. |
D |
|
| Daily Interest | Interest on a home loan is calculated on a daily basis on the outstanding loan balance. |
| Debt-to-Income Ratio (DTI) | A personal finance measure that compares an individual’s monthly debt payment to their gross monthly income. Lenders use DTI to determine a borrower’s ability to manage monthly payments and repay debts. |
| Debtor | A party who owes money. |
| Deed | A legal document that transfers ownership of a property from one person to another. |
| Default | Failure to perform a mandatory condition of the lending contract. |
| Deposit Bond | A substitute for a cash deposit that guarantees the purchaser will pay the full deposit amount by the settlement date. Institutions providing deposit bonds act as guarantor that payment will be made. |
| Deposit | An initial cash contribution towards the purchase of the property, usually payable on signing/exchange of contracts. |
| Depreciation | An accounting term used to describe the reduction in the value of assets. An annual reduction in the value of assets is allowable under Australian tax law and would be declared as an expense to offset income for taxation purposes. |
| Discharge | Release of a registered mortgage that was on the title of the property. |
| Disclosure | What property sellers are required to tell prospective buyers including things such as the state of the property, its title, and any outstanding debt on the property amongst other things. |
E |
|
| Easement | A right to use a portion of land owned by another party. It will be registered on the title and could affect the value of the property. |
| Effective Interest Rate | A sum of interest, fees and charges incurred over the life of a loan, displayed as an average annual interest rate. |
| Encumbrance | An outstanding liability or charge registered on the property title, e.g. a mortgage or caveat. |
| Equity Loan | A loan that uses the equity in your property to borrow for any personal purpose, including personal investment. An equity loan usually operates like an overdraft, where the borrower has a set credit limit against which they can draw funds. The term equity loan can also refer to a line of credit loan. |
| Equity | The difference between the value of an asset and any debt owing on the asset. For example, a property worth $500,000 with an outstanding mortgage debt of $150,000 will have equity of $350,000. |
| Establishment Fee | The fee charged by the lender to establish a loan. Also known as an application fee. |
| Exit Fees | Costs associated with ending your mortgage before the agreed-upon term. Check with your lender to minimise these sorts of fees as much as possible. |
| Expression of Interest | Terminology related to making an offer to buy a house. An expression of interest falls somewhere between a private treaty and an auction where the vendor markets the property without a price and with a certain deadline to complete the sale, so buyers are encouraged to offer their best price up front and not negotiate. |
F |
|
| Favourable Purchase | An asset being purchased at less than market value, usually from a family member. |
| First Home Guarantee Scheme | A federal government initiative where the government acts as loan guarantor, designed to help first-home buyers to purchase their first home with a deposit as low as 5% without having to pay mortgage insurance. |
| First Home Loan Deposit Scheme | A government scheme allowing first time buyers to pay only 5% deposit without incurring Lenders Mortgage Insurance. |
| First Home Owner Grant (FHOG) | Various state governments provide financial grants to assist first home buyers to meet the cost of purchasing their home. |
| First Home Super Saver Scheme | A federal government initiative that allows you access to your own superannuation contributions, not those of your employer, to use towards your home loan deposit. |
| Fixed Charge | A fixed charge is a security over specific assets of a business. See also mortgage debenture. |
| Fixed Interest Rate | An interest rate set for a fixed period. At the end of the fixed rate period, most lenders will allow you to fix again at the current rates or revert to their standard variable rate. |
| Floating Charge | A floating charge is a security interest over non-specified assets of a business. See also mortgage debenture. |
| For Sale by Owner | The sale of a property by the owner directly to a buyer without the use of a real estate agent. |
| Foreclosure | Process by which a lender takes possession of the security property to satisfy the debt for loans that are in arrears and where all attempts to rectify that loan have failed. |
| Freehold Title | The form of property ownership where a parcel of land fully belongs to the owner. |
| Full-Documentation (Full-Doc) Loan | A term used to describe loan applications where income can be verified via payslips, salary deposits etc., to provide a high level of income verification. |
G |
|
| Genuine Savings | Funds that have been accumulated or held for a certain period before applying for a loan (generally a minimum of three months). |
| Guarantee | An agreement in writing to meet the financial obligations of another party if they fail to meet their contractual obligations. |
| Guarantor Loan | With a parent or friend signing as a guarantor on the loan (putting their own home equity forward as security), individuals with minimal or no deposits can borrow up to 105% LVR. |
| Guarantor | A guarantor is a third party to a loan and helps the borrower obtain finance by offering additional security. Guarantors are generally limited to immediate family members. A guarantor may be liable for the loan debt if the borrower defaults. |
H |
|
| Home and Contents Insurance | An insurance policy taken out to insure against loss or damage of property through things such as a fire. |
| Home Equity Loan | A type of loan that uses the equity built up in your property to purchase an investment property or make renovations or investments. The money you borrow is then added back onto your mortgage. |
I |
|
| Income Statement | Also known as a ‘Profit & Loss Statement’, this is a representation of all income and expenditure of a business, usually for a 12-month period. |
| Insolvency | The inability of a business or person to repay their debts even after the sale of assets. |
| Interest Only (IO) | An arrangement where the borrower pays the lender only the interest component of their loan obligation for a specified period. |
| Interest Rate | The percentage of a loan charged as interest to the borrower. |
| Interest | When money is borrowed, interest (expressed as an interest rate percentage) is charged by the lender based on the amount owing and forms part of the borrower’s repayment obligations. |
| Introductory (Honeymoon) Rate | Also known as a honeymoon rate. A reduced interest rate offered for a specified period of a loan, usually the first 12 months. |
| Investment Loan | A loan provided to borrowers seeking to buy a property that will be rented out to generate income. |
| Investment Property | When a borrower buys real estate with the intention of earning capital gains. They might rent it out. |
J |
|
| Joint Tenants | Equal holding of property between two or more persons. If one party dies, their share passes to the survivor/s. This is a common arrangement for married couples. |
L |
|
| Land Tax | A tax levied on the value of the land, regardless of the property built. Different states have different land tax rules. |
| Land Titles Office | A state government body that is responsible for the maintenance of registers containing details of all property titles. |
| Lease | A contract granting use of an asset for a certain period at a specified monthly rental. |
| Lender | A bank or financial institution lending funds for purchasers to buy property. |
| Lenders’ Mortgage Insurance (LMI) | A form of insurance taken out by the lender to safeguard against a financial loss in the event of a security being sold due to the loan going into default. The borrower pays a once-only premium. The insurance covers the lender, not the borrower. |
| Letter of Demand | A letter detailing a breach of contractual loan conditions, demanding that they be fixed within a certain time frame. |
| Liabilities | A person’s debts or financial obligations, including existing credit card debts and personal loans. |
| Line of Credit | A flexible loan arrangement where the borrowers can draw down and repay the loan as they choose within a specified limit. Also referred to by some lenders as an equity loan or all-in-one loan. |
| Liquidation | Process by which a company is wound up and assets are sold to defray debts, with proceeds distributed to creditors (as opposed to shareholders). |
| Loan Increase | Refers to increasing an existing loan, usually for personal purposes (e.g. debt consolidation or minor property renovations). May include a ‘cash out’ element where the borrower draws on the equity they have in the property for their own purposes. |
| Loan Term | The contractual period of a loan by when monies owed must be repaid. |
| Loan-to-Value (LTV) Ratio | The ratio of the home loan amount compared to the value of the security. Commonly called LVR. For example, for a loan of $270,000 on a home valued at $300,000, the LVR is $270,000 divided by $300,000 expressed as a percentage, i.e. 90%. |
| Low Documentation Loan | A term used to describe a lower level of income verification. Often used by self-employed borrowers. |
M |
|
| Margin | Difference between the interest rate for the borrower and the cost of those funds to the lender. |
| Mortgage Broker | A professional who helps prospective homebuyers find the best mortgage deals. Mortgage brokers work with multiple lenders to offer a variety of loan products to clients. |
| Mortgage Calculator | A tool available on lenders’ websites that allows you to determine your repayment amounts over the course of your mortgage once you key in the loan amount, the length of the mortgage and a fixed or current interest rate. |
| Mortgage Registration Fees | A state-government fee to register the physical property as the security on the home loan. This allows any future buyers to check any claims that may exist on the home, payable when the loan is established. |
| Mortgage Stress | The financial burden experienced by homeowners who spend a disproportionate amount of income paying off a home loan. |
| Mortgage | The legal agreement between a lender (mortgagee) and a borrower (mortgagor) that gives the lender the right to take the borrower’s property if they fail to repay the loan plus interest. |
| Mortgagee | The party granting the mortgage, usually in exchange for providing funds, i.e. the lender. |
| Mortgagor | A person who borrows money and grants a mortgage over their property as security for the loan, i.e. the borrower. |
N |
|
| National Consumer Credit Protection Act (NCCP) | A legal Act that regulates the provision of consumer credit. Loans are regulated by this legislation, provided the purpose is predominantly (50% or more) for consumer purposes. |
| Negative Gearing | The ability to reduce tax liability based on substantiated losses against income-bearing investments, such as an investment property. |
| No-documentation (No-doc) Loan | A term used to describe a level of verification where almost no information is needed except applicant identification, and where the emphasis is on security. Usually for short-term lending at low LVRs, and where the loan purpose is non-regulated i.e., non-NCCP. |
| Non-bank Lender | A financial institution or individual that provides a mortgage outside of the traditional banking system. |
| Non-conforming Loan | Specialist lenders provide these types of loans to borrowers who fall outside the normal eligibility requirements of mainstream lenders. |
| Non-resident for Tax Purposes | The ATO judges residency differently. If a person has no financial obligation to Australia (they can prove this with a few tests), they may cease their tax residency. Therefore, they only have to pay tax on Australian sourced income. Tax residents must pay tax on worldwide income. |
| Non-resident Income Tax | Foreign residents for tax purposes are charged a higher tax rate on Australian sourced income and capital gains with no tax-free threshold. |
| Non-resident | Someone without Australian citizenship or permanent resident. They may be a foreigner residing abroad or in Australia with temporary residence. |
O |
|
| Off-the-plan Purchase | A contract to purchase a property that is not yet built. |
| Offset Account | A transactional account linked to the home loan. The balance held in this account offsets the balance in the home loan, helping to reduce the interest paid and the overall term of the loan. |
| Old System Title | A form of property ownership determined by common law. It is a document that details the chain of ownership of a property, including the current ownership. All historical documents must be intact to prove current ownership. |
| Ombudsman | An arbitrator to whom customers can make complaints about their loan consultant or lender and have it dealt with independently. |
| Origination | The process by which lenders source and write loans. |
| Overdraft | An authorised limit by which the account can be overdrawn, providing access to additional funds. |
| Owner Occupier | A person owning and living in the property, as opposed to renting it to others. |
| Owner’s Equity | A term used to determine the value of the business, i.e. the difference between what the business owns and what it owes. |
P |
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| Permanent Resident | A permanent resident is someone with permission to spend an unspecified amount of time living and working in Australia. However, they are not yet Australian citizens. |
| Positive Gearing | Making a profit on an investment property, i.e., rental income outweighs expenses. |
| Power of Attorney | Someone with the authority to act on an individual’s behalf on all financial and legal matters. |
| Pre-Approval | A preliminary evaluation by a lender to determine how much a potential borrower can afford to borrow. |
| Principal and Interest Loan | A loan in which both principal and interest are paid with each repayment during the term of the loan. |
| Principal | The sum of money borrowed and therefore owed to a lender, excluding interest and other charges. |
| Private Treaty | Negotiating a sale price for a property with the seller without going to auction. The majority of properties in Australia are sold through private treaty. |
R |
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| Real Estate Agent | An individual or company working on behalf of the vendor to help sell the property for the best price. |
| Redraw Facility | A loan facility that allows a borrower to make additional repayments and then access those extra funds if necessary. |
| Refinancing | To replace or extend an existing loan with funds from the same lender or a different lender. |
| Rental Yield | The profit made on an individual’s rental property, i.e., the gap between rental income and expenses paid on the investment loan and upkeep of the home. |
| Rentvesting | When an individual purchases an investment property in a more affordable location while renting a property in a more expensive place that they would like to live in. |
| Repayment Holiday | If an individual is in mortgage stress or has previously made extra repayments, the lender might agree to a repayment holiday. Essentially, the borrower pauses their scheduled repayments. |
| Reserve | The minimum amount the seller is willing to sell the property for at an auction. |
| Reverse Mortgage | Also known as a ‘seniors loan’, this type of loan is aimed at retirees and allows them to take a loan as a lump sum and/or income stream, using the equity in their home. Although interest accrues on the loan, no ongoing repayments are required. The loan is repaid when the borrower’s home is sold, they pass away or move into aged care. |
S |
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| Second Mortgage | An additional loan against your first property usually taken out with a second lender. They are deemed high risk and usually attract higher fees and interest rates and should generally only be used in cases of financial emergencies. |
| Security | The collateral offered as security for a loan is usually things like property, term deposits and shares, but other forms of security may be acceptable to some lenders. |
| Self-Managed Superannuation Fund (SMSF) Loan | A loan granted to a SMSF so it can acquire property in the fund’s name. |
| Sequestration | The act of removing, separating or seizing anything from the possession of its owner under process of law, for the benefit of creditors. |
| Settlement Date | The date on which the new owner finalises payment and assumes possession of the land. Sometimes called the ‘drawdown’ date, as this is the date the loan is usually fully drawn. |
| Settlement | Finalisation of a financial transaction to start a loan. Documents and monies are exchanged to initiate the loan and formalise security. |
| Split Loan | A loan that includes both fixed and variable components. |
| Stamp Duty | A charge applied by state governments for various transactions including the acquisition of property. Most states offer some form of concession on stamp duty for first home buyers depending on the value of the property. |
| Standard Variable Loan | A loan that has an interest rate that varies according to market forces. The loan usually has comprehensive features, such as offset and redraw facilities. |
| Strata Title | A property title that grants ownership of a ‘unit’ in a larger building. This title is accompanied by body corporate membership involving management of the larger building. |
| Stratum Title | Similar to company title. The owner of this property title will be a shareholder of the company that manages the common areas of the property (as opposed to a member of a body corporate). |
| Subject to Finance | A clause in the home loan that provides security for the buyer if they cannot find approval for their home loan before the settlement date. |
| Survey | A plan that shows the boundaries and the building position on a block of land. |
| Switching Fees | Costs associated with switching your loan from a fixed-rate to a standard variable rate, for example, either with your current lender or a new one. |
T |
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| Tax Deductions | Taxpayers can deduct property-related expenses from their taxable income, such as property management fees, advertising for tenants, and maintenance. |
| Tax Resident | Someone with financial ties to Australia who has to pay tax on their worldwide income and capital gains. Generally speaking, tax residents live and earn in Australia. |
| Tenants in Common | Where more than one person owns separate, defined portions of a property. If one person dies, the relevant portion passes through the deceased’s estate rather than to the other property owner/s as with joint tenancy. Each owner can hold a specific share of ownership and has the right to dispose of their interest. |
| Term | The length of a loan or a specific portion of time within the loan. |
| Title Insurance | A policy that protects against losses due to disputes over the ownership of a property. |
| Title Search | A request to the Lands Titles Office to determine the owner of a particular property and any encumbrances (mortgages), covenants, or easements on the title. |
| Torrens Title | Torrens title is the most common form of property title in Australia. It is a form of property title based on a centrally managed register system (the Lands Title Office), evidenced by the Certificate of Title. This shows the current owner’s name and any other interests in the property (e.g. mortgages). The owner has full control over the property. |
| Transfer of Land | An instrument which authorises the Land Titles Office (LTO) to record a change in property ownership. |
| Trust | An entity set up to own and distribute money and property to specified beneficiaries. A trustee is appointed to act as the administrator of the trust on behalf of the beneficiaries. |
U |
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| Unconditional Approval | When the lender has thoroughly checked an individual’s financial records and credit report and completed a property valuation, they may offer formal or unconditional approval. This means that they are prepared to lend the borrower the funds to purchase the property. |
| Underwriting | The process by which a lender assesses the risk of lending money to a borrower based on their financial information. |
| Unencumbered | A property free of encumbrances or restrictions, such as mortgages and other liabilities and charges. |
V |
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| Valuation | An assessment of the current and/or future value of a property. Usually, the assessment will be of the property’s market value. Lenders generally require a professional to undertake some form of valuation of the property that is securing the loan. |
| Variable Interest Rate | An interest rate that moves up or down during the term of the loan in line with market forces. |
| Variable-Rate Mortgage | A mortgage with an interest rate that can change periodically, based on market conditions. |
| Vendor | The seller of a property. |
