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Glossary of Financial Terms

Additional Repayment
An extra or lump sum repayment made in addition to regular periodic repayments.
Some types of loan products do not allow you to make additional repayments, or place limits on the repayment amount.

Amortization
A schedule of payments over the life of your loan to get the loan from the original dollar amount to zero. An Amortization Schedule will show the scheduled repayments of a loan through regular installments over a period of time.

Application Fee
Fee charged by the lender to process your loan application. Can sometimes be included in the loan amount thereby reducing the up front cost of establishing a loan.
Also known as an establishment fee or approval fee.

Approval in Principle
Finance approved by a lender before you have found a property that you wish to purchase. This allows you to make an offer on a property (eg. bidding at an auction) safe in the knowledge that you can get finance for the pre-approved amount, providing your circumstances have not changed and the property meets the lenders requirements.

Arrears
When you are overdue for a loan payment.
A lender will want to know if you have ever been in arrears on your other loans.

Assets
Your assets are what you own. A lender will want to know about your assets such as real estate, bank accounts, shares, motor vehicles etc.

Break Costs
Fees or penalties charged by a lender when a customer decides to end or “break” from a fixed interest rate before the end of the agreed fixed term.

Bridging Loan
A short term loan (typically less than 12 months) designed to allow you to finance the purchase of a new property before you have sold your existing property.

Building Inspection
An inspection carried out prior to purchasing a property, generally by a qualified builder, to check for any defects or problems in the structure. The sale contract can be made subject to a building inspection, allowing the purchaser to pull out of the contract if problems are found, or negotiate a new price.

Capital Gains Tax
This is a federal tax payable on profits made from the sale of a variety of assets (including investment properties). Assets purchased prior to 1985 are exempt.
Your principal place of residence (where you live), providing it has never been rented out or used for business purposes, is also exempt.

Capped Rate Loan
A loan where the interest rate is guaranteed not to rise above a certain percent (i.e. the interest rate is “capped”), but may fall in the event of a rate drop. The capped rate period is normally 6 or 12 months.

Certificate of Title
A document showing amongst other things the ownership of a property and whether there are any mortgages on it.

Commission
Real Estate agents receive a commission from the vendor when they sell a property, while Mortgage Brokers receive a commission from a lender when they sell a home loan product.

Comparison Rate
Comparison rates are a good “yardstick” or “rule of thumb” which gives consumers a better indication of the true cost of a loan than simply comparing advertised interest rates.
Comparison rates take into account the actual interest rate for the loan, and other typical lenders’ fees and charges incurred during the life of the loan, such as ongoing monthly account fees and application fees, etc.
Eg. a loan may have an advertised interest rate of 7.2% and a comparison rate of 7.4%.
Not all fees and charges are included in comparison rates (i.e. fees that are only incurred in certain circumstances such as redraw fees are not included).

Construction Loan
A loan that caters for people building or renovating.
The loan amount is generally drawn down progressively as various stages of construction are completed and builder’s invoices are received.
An evaluation of the work done may be required at each draw down stage.

Contract of Sale
An agreement outlining the terms and conditions of a sale.
The contract will include the purchase price and any conditions such as “subject to building inspection” and “subject to finance”, etc.

Conveyancing
The process generally undertaken by a solicitor or Conveyancing specialist of transferring property ownership.
Conveyancing costs including legal fees, title transfer fees and stamp duty all need to be considered when you are applying for a home loan.

Credit History
Your credit history, including any previous loans and credit cards you have applied for, any history of bad debt or bankruptcy etc.
They may also ask other questions such as whether you have been in arrears on other loans or whether you have ever exceeded your credit card limit.

Default
This is the failure of a borrower to meet the conditions of a mortgage agreement.
If the borrower defaults on their loan, the lender may take possession of the property and sell it to cover the outstanding loan amount.

Deferred Establishment Fee
This is an establishment fee that is only payable when a loan is repaid within the first few years (typically 3 to 5 years) of the loan period.

Deposit
A deposit is usually required when you are taking out a home loan.
Generally a minimum deposit of 20% is required, or if mortgage insurance is taken out you may only need a 5% deposit.
Some lenders offer no deposit home loans if you have proven cash flow, although these products may come at a higher interest rate.

Discharge
When a mortgage is repaid in full, it has been “discharged”.

Discharge Fee
A fee charged by the lender to cover the administration costs of finalizing and discharging a mortgage.

Discount Rate
See Honeymoon Rate

Debt to Service Ratio
DSR is a figure that lenders use to determine your ability to repay your loan.
It is basically the percentage of your income that will be used to service your loan plus any other debts (eg. credit cards).
As a general rule most lenders will allow a DSR of between 30% and 35%.

Equity
Equity is the difference between the market value of a property less any amount still owing on the mortgage.
As the borrower pays off the loan principal, equity in the property will increase.
Rising house values will also increase equity.

Equity Loan
A loan where you borrow against the value of your house (potentially up to 90% of the value of your house, less any outstanding loan amounts on the property)
The funds are then available for any personal use, similar to a personal loan but at a lower interest rate. Also see Line of Credit Loan.

Establishment Fee
See Application Fee.

Expenses
What you spend, including loan repayments, credit card repayments, rent, insurance etc.
Lenders will need to know your monthly expenditure when you are applying for a loan.

First Home Owners Grant
A Federal Government subsidy which first home owners may be eligible to receive.
The funds received from the FHOG can be included in the settlement of your loan.

Fixed Rate Loan
A loan where the interest rate is fixed for a set period, ranging from 1 to 15 years.
This means your loan interest rate won’t fluctuate as it does with a variable loan.
Generally, the longer you want to fix your loan, the higher the interest rate will be, i.e.
you may be able to fix your loan for 1 year at 6.5%, or for 5 years at 7.7%.

Guarantor
A person who guarantees to pay out a loan for you in the event you are not able to make the repayments yourself. A lender may require someone (eg. a family member) to guarantee your loan if you would not be eligible for the loan in normal circumstances.

Honeymoon Rate
A reduced interest rate offered usually for the first year of the loan, after which the loan will revert to a standard rate.

Installment
A regular repayment that the borrower makes to pay off a home loan.
These repayments will typically be made at monthly, fortnightly or weekly intervals.

Interest in Advance Payments
Payments made to cover upcoming interest charges, usually on an investment home loan with interest only repayments.

Interest Only Payments
Payments made on a loan which only cover interest charges, i.e. these payments do not reduce the principal loan amount.
This is generally only used for investment loans, and the period of interest only payments is typically set from 1 to 5 years.

Interest Rate
This is the rate (as a percentage) at which interest will be charged on your home loan.
Advertised interest rates vary between lenders and between various types of loans due mainly to competition between lenders.
On going interest rates (and hence repayments) fluctuate periodically in line with official interest rates set by the Reserve Bank of Australia.
Loans established with a fixed interest do not follow these fluctuations.

Introductory Rate
See Honeymoon Rate

Investment Loan
A loan taken out for the purpose of buying an investment property.
Investment loans have features suitable for non owner occupied home loans, such as making interest only payments or paying interest in advance.

Liabilities
Your liabilities are your debts, or what you owe.
When applying for a loan, lenders will want to know about your liabilities such as existing home loans, personal loans, hire purchases, credit card limits etc.

Line of Credit Loan
Repayments are usually very flexible, meaning you can make repayments whenever you like and for any amount, providing you stay within your credit limit.
The loan is usually ongoing, with no fixed term. Also see Equity Loan.

Loan Administration Fee
An ongoing monthly fee charged by the lender for maintaining and administering your loan.
Most lenders have a variety of loan products, some with monthly fees and some without.

Loan Approval Fee
Fee charged by the lender to process your loan application.
Some lenders may waive or reduce this fee for certain products.
Also known as an application fee or establishment fee.

Loan Maintenance Fee
See Loan Administration Fee

Low Doc Loan
Low Doc Loans are offered by some lenders to people who lack the normal income statements or tax records to prove their income.
Suitable for people who are self employed or who have irregular cash flow.
The lender will still require proof that the loan can be serviced.

Loan to Value Ratio
LVR is calculated by comparing the loan amount to the property value, eg. for a loan application of $400,000 on a property worth $500,000, the LVR would be 80%.
As a guide, most lenders will lend amounts up to 80% LVR, or higher with mortgage insurance – these figures will vary between lenders and between loan products.

Mortgage
An agreement between a borrower and a lender, with the borrower providing security (i.e. the subject property) for the loan.

Lenders Mortgage Insurance
LMI protects the lender against potential losses should you default on your home loan, and the proceeds from the sale of the property not cover the remaining loan amount.
A lender will often require you to take out Mortgage Insurance if you wish to borrow more than 80% of the value of the property. A one off fee payable when the loan settles.

Mortgage Offset Account
An account which allows you to offset the funds you have in a transaction (savings) account against your home loan, thereby reducing the interest you will pay on the loan, eg. if your loan amount is $400,000 and you currently have $20,000 in your savings account, you will only pay interest on $380,000.

Mortgage Protection Insurance
Protects the borrower against loss of income due to sickness or redundancy.
If considering Mortgage Protection Insurance you should seek professional financial advice from an accountant or a financial planner.

Mortgage Registration Fee
A State Government charge to register you mortgage. Fees vary from state to state.
The Mortgage Registration Fee will be part of the establishment costs of your loan (along with stamp duty, transfer fees etc).

Mortgagee
A lender of money, with the loan secured by the borrowers (mortgagors) property as agreed to in a mortgage document.

Mortgagor
Someone who borrows money from a lending institution (the mortgagee) and provides property as security for the loan, as agreed to in a mortgage document.

Negative Gearing
Negative Gearing occurs when you borrow for investment purposes (i.e. to purchase an investment property), and the costs of the investment exceed the returns from the investment (i.e. rental income).
You should seek professional financial advice from an accountant

No Deposit Home Loan
Allows you to borrow 100% (and sometimes more) of the property value.
You will usually require a very clean credit history and proof of regular, stable income and the ability to service the loan.
More stringent Debt to Service Ratio limits and a higher interest rate could apply.

No Doc Loan
Similar to a Low Doc Loan, in place of proof of income you will be required to sign an agreement certifying that you will be able to service the loan.
With this type of loan, a lower Loan to Value Ratio will typically apply.

Non-conforming Loans
Loans where the standard loan criteria (proof of employment, proof of income etc) are not met. Low Doc Loans and No Doc Loans can be described as non conforming loans.

Ongoing Monthly Fee
Charged by the lender for administering your loan.
Most lenders have a variety of loan products, some with monthly fees and some without.
Also known as a loan maintenance fee or a loan administration fee.

Portable Loan
A loan that allows you to transfer a mortgage from one property to another without having to go through the full approval process.

Pre-approved Loan
See Approval in Principle

Principal
The amount borrowed from a lender, upon which interest is charged.
As loan repayments are made the principal decreases.

Progress Draws
Amounts withdrawn from a construction loan made when progress payments to your builder are due.
As construction proceeds, your builder will require payment when certain stages are met, at which time you draw down a portion of your loan, until construction is finished and the final draw down occurs.

Redraw Facility
Allows you to redraw funds from your loan that you have paid in advance.
Restrictions usually apply (eg. a minimum amount you are allowed to redraw), and you may be charged a fee for redrawing.

Refinancing
When a mortgage is taken out and some or all of the funds are used to pay off another existing mortgage. The new mortgage may or may not be with the same lender.
Refinancing is often used to access built up equity in a property, or simply to move to a cheaper home loan.

Repayment Period
This is the frequency with which you make your loan repayments (i.e. weekly, fortnightly or monthly) depending on the lender and the loan product.

Reverse Mortgage
These loans are aimed specifically at seniors.
A Reverse Mortgage allows the borrower(s) to take out a loan against their property (usually only up to a comparatively small LVR, such as 25% or less), repayments are not required until the property is sold, the borrower(s) move from the home or the borrower(s) are deceased. Often referred to as an equity release loan.

Security
When applying for a home loan, assets will be required to secure the loan.
On most standard home loans the security will be the property being purchased.
In some circumstances more than one property may be required to secure the loan.

Settlement Date
This is the date on which you receive the funds from your loan, pay the vendor and take possession of the property. Payment of establishment fees such as stamp duty and mortgage registration is also required on the settlement date.

Split Loan
A loan which is split into a fixed interest rate component and a variable interest rate component, combining the security of a fixed loan and the flexibility of a variable loan.

Stamp Duty
A State Government tax paid on both the loan amount and the value of the property.
Varies state to state, and may be discounted in certain circumstances for first home buyers.

Stamp Duty Concessions
Stamp duty concessions (waivers or discounts) are available for first home buyers.
The amount of the concession will vary from State to State.

Survey
A plan of a property, showing the precise dimensions and positioning of the property boundaries, any building(s) on the land and (if applicable) any easement(s).
A surveyor can use the plan to check the boundaries of a property prior to purchase.

Term
The duration of a loan, for a typical home loan mortgage, a term of 25 or 30 years is fairly standard. Loan terms are sometimes specified as a number of months, i.e. a 30 year loan can be expressed as 360 months.

Title Search
Part of the Conveyancing procedure, this is a search of the State Government’s Titles database that is undertaken by the legal representative of a borrower.
The search will provide details of who owns the property, as well as who has an interest in the property (eg. any lender who holds a mortgage over the property).

Title Transfer Fee
This is a State Government fee charged when you purchase a property, and covers the transfer of the title deed for that property; concessions (waivers or discounts) are available for first home buyers.

Uncommitted Monthly Income
The net income that is available once all monthly expenses are deducted.
Monthly expenses may include home loan repayments, personal loan repayments, credit card repayments and any other payments or general living expenses.
Most lenders will require that you have a certain level of uncommitted monthly income before they offer you a loan. See also Debt to Service Ratio

Valuation
A report that outlines the value of a property and how the figure was reached.
The lender will require a valuation from a certified valuer (of their choosing) before approving a loan. The borrower is responsible for paying the valuation fee, even if the loan does not proceed, note: valuation fees run into 100’s of dollars!

Variable Rate Loan
A loan where the interest rate varies with fluctuations in the mortgage market and changes in official interest rates by the Reserve Bank of Australia. As the official interest rate changes, so do your minimum repayment obligations. See also Interest Rate.

DISCLAIMER: Sender is NOT a Securities Dealer or Broker or Investment Adviser. Sender is a Facilitator and makes no warranties or representations as to the Buyer, Seller or Transaction. All due diligence is the responsibility of the Buyer and Seller.