Glossary – Lending
A
AAPR (also known as the ‘Comparison Rate’): Average Annualised Percentage Rate. The AAPR was introduced in Australia in 2003 to help consumers compare the cost of different loans. The AAPR includes both the interest rate and most fees and charges payable during the life of the loan, expressed as a single percentage figure. All lenders are legally required to disclose this benchmark rate in their advertising of home loans, which then allows consumers to compare different loan products with one another more effectively.
Accrued Interest: Interest which has been calculated and added to the interest amount payable, but which has not yet paid.
Amortisation period: The period of time in which the mortgage needs to be paid off. For residential properties the amortisation period is often 30 years. For commercial properties, the amortisation period is often 10 years.
B
Basic or ‘No Frills’ Loans: Basic loans are discount home loans with a lower variable interest rate than the standard variable rate loan. The trade off is that these discount loans generally have less flexibility and fewer features, e.g. no extra repayments can be made, the repayment level cannot be varied or no redraw is available.
Break Costs (also known as an Exit Fee): This is a fee which comes into effect should when a borrower pays off their fixed rate loan in part of in full, before the expiry of the fixed rate period.
Bridging Finance: short-term loan (usually 6-12 months) that covers a financial gap between the purchase of a new property and the sale of an old property.
C
Capital Gains Tax: A federal tax on the monetary gain made on the sale of an asset bought and sold after September 1985.
Capped Rate Loan: A Loan where the interest rate is guaranteed not to exceed a stated rate for a set period of time, but where the interest rate can fall.
Caveat: Usually in the form of a contract clause that stipulates a particular requirement. Latin for “beware”.
Certificate of Title (Also known as a ‘Title Deed’): A certificate which issued by a government body and which describes a title reference to a particular parcel of land, the registered owner of that land and any encumbrances registered against the title.
Chattels: Real chattels are buildings and fixtures. Personal chattels are clothes and furniture.
Comparison Rate (also known as ‘AAPR’): The Comparison Rate was introduced in Australia in 2003 to help consumers compare the cost of different loans. The comparison rate includes both the interest rate and most fees and charges payable during the life of the loan, expressed as a single percentage figure. All lenders are legally required to disclose this benchmark rate in their advertising of home loans, which then allows consumers to compare different loan products with one another more effectively.
Conditional Approval: An initial approval by a lender which is virtually always subject to a property valuation, and may also be subject to other factors such as mortgage insurance or the submission of further documentation. In many cases a lender will issue conditional approval which is valid for a 3 month period.
Contract of Sale: A written agreement between the buyer and vendor outlining the terms and conditions for the purchase or sale of property.
Conveyancing: The legal process of transferring ownership of property from one party to another.
Covenant: The terms and conditions governing the usage of a block of land or the buildings on it.
Credit Rating: A report which is given by a credit reporting agency, and which contains information about someone’s credit rating and history. This report contains information about whether or not someone has ever been declared bankrupt, current involvements in businesses, and an overall creditworhtiness rating.
D
Deposit: This is the amount of money (often 10% of the purchase price), which a buyer pays on exchange of cotract. The deposit is only applicable once the contract of sale has been accepted by the vendor.
Deposit Bond (or Bank Guarantee): This is usually required when buying a house and land package or off the plan and you dont want to use cash funds for a deposit. A company called Deposit Power is the main source of these documents. Minimum requirements for short term deposit bonds is lender Indicative approval with the only remaining condition being a Valuation.
Where there’s a long term deposit bond required, the major banks will generally formally approve the deal with a condition that land must be registered just prior to or at settlement. Once you have Formal approval you can obtain the Deposit Bond.
Long term deposit bond is where settlement period > 6 months and max sunset date 4yrs. LVR: Buyer must have 50% net equity in existing equity (50% of purchase price) / Ex:ample: If purchase is $500k then buyers needs to have $250k net equity in existing property portfolio to qualify for the deposit bond on the purchase.
Depreciation: A non-cash expense which allows property investors to deduct certain amounts from their taxable income over time. Depreciation schedules must be written up by a quantity surveyor.
Discharge Fee: A one-time payment on the final payout of a loan.
Drawdown: The actual transfer of funds from the lender to the buyer, once setlement has taken place.
E
Encumbrance: An outstanding liability or charge on a property such as a mortgage.
Equity: The amount of an asset actually owned i.e. the amount of an asset not subject to any lender’s interest.
Equity Loan (also know as a Line of Credit): This kind of loan operates much like an overdraft facility, where the borrower can withdraw extra funds (up to an agreed ceiling) at any time. This credit is secured by the borrower’s proportional ownership of their property.
Establishment Fee: Also called Application Fee. It is the fee which lenders charge to process a loan application. These are paid up front and are usually not refundable unless the loan is refused.
Evidence of Income: This is one of the most important factors in getting a loan application approved. For employed buyers, applicants generally need to provide copies of their two most recent payslips, and their most recent group certificate. For self-employed buyers, applicants generally need to provide copies of their two most recent tax returns.
Exchange of Contracts: A formal legal process that creates a binding contract for the sale of real property on agreed terms, during which time a holding fee or deposit is usually paid to the seller. The exchange of contracts is most often governed by a three day cooling off period.
Exit Fee: (also known as Break Costs): This is a fee which comes into effect should when a borrower pays off their fixed rate loan in part of in full, before the expiry of the fixed rate period.
F
First Home Owner Grant: A Federal Government grant given to buyer’s who are purchasing their first property, and who fulfill the necessary criteria, such as an intention to live in the property themselves within the first 12 months. This grant is currently $7,000.00
Fittings: Items that can be removed from a property without causing damage to it, such as blinds, curtains, and carpets.
Fixed Interest Rate: An interest rate that is locked in for a specified period of time.
Fixtures: Items that cannot be removed from a property without causing damage to it, such ducted heating systems and airconditioning units.
G
General Lien: A written document outlining a bank’s right to retain property until a debt is paid. It includes Power of Attorney and other clauses generally contained in bank security forms.
Government Charges: State and government charges which may include transfer of land stamp duty, mortgage stamp duty, and transfer and mortgage registration fees.
Gross Income: Money earned by a person or company, before tax, superannuation or payroll deductions.
Guarantee: A form of security for a loan where another person or entity promises to repay the loan if the borrower defaults.
Guarantor: A person who agrees to provide a guarantee for someone else.
H
‘Honeymoon’ Rates: These are introductory rates offered at the start of a loan, in which the initial interest rate is usually up to 2% lower than the standard rate.
I
Interest Only (I/O): The borrower only pays the actual interest on the loan for a specific time (usually between one and five years). This form of repayment is often used by property investors to maximize cash flow and tax benefits. During the term of the interest only period, the size of the loan is not reduced.
Internal Rate of Return: A measure of the return on an investment which denotes the rate of interest at which the present value of future cash flows is equal to the cost of the investment or loan.
J
K
L
Line of Credit (LOC also know as an Equity Loan): This kind of loan operates much like an overdraft facility, where the borrower can withdraw extra funds (up to an agreed ceiling) at any time. This credit is secured by the borrower’s proportional ownership of their property.
Loan Statement: Lenders are required to send out statements (at least once a year, but generally they do so more often) showing the balance of the loan, and all payments made by the mortgagor. These documents are important when it comes to refinancing a property, or taking out an additional mortgage.
‘Low Doc’ loan: When taking out a mortgage, a buyer is required to show evidence of income, and to prove their ability to service a loan. Low doc loans are suitable for self employed buyers or those who cannot provide or do not wish to provide evidence of payslips etc. The buyer basically just makes a statement that they can afford to take out the loan. With the acceptance of such a loan, the lender takes on more of a risk, and consequently interest rates are generally higher for these kinds of loans than for conventional loans.
LVR (Loan to Value Ratio): The percentage which relates to the borrower’s own monetary contribution to the overall price of a property in relation to the amount being supplied by the lender. For example, if the sale price of a property is $500,000 and buyer is borrowing $400,00 towards the property, then the LVR is 80%. For many residential properties a LVR of 80% is common, although some lenders may lend as much as 105% of the purchase price. In Australia, loans above n 80% LVR require the buyer to take out mortgage insurance.
M
Mortgage: A document which creates a security interest over a property to a creditor, as security for a loan.
Mortgagee: The party who holds a mortgage as security. For example, if a buyer takes out a mortgage with Westpac, then Westpac is the mortgagee.
Mortgagor: The borrower who provides a mortgage over their property as security for a loan. For example, if a buyer takes out a mortgage with the Commonwealth Bank, then the buyer is the mortgagor, and the Commonwealth Bank is the mortgagee.
Mortgage Insurance: A buyer is required to pay a lender for mortgage insurance when taking out a loan in which the LVR (Loan to Value Ratio) is more than 80%. The insurance covers the lender should the buyer default on payments. Mortgage insurance therefore covers the lender and not the buyer, altough it is the buyer who must pay for it. Mortgage insurance is a one-off payment; there are no yearly or ongoing costs.
Mortgage Stamp Duty: This is a State Government tax, applicable to new mortgages as well as refinanced loans. The amount varies from state to state, with some states offering concessions for first home buyers. Mortgage stamp duty is calculated as a percentage of the purchase price. Mortgage stamp duty is separate from standard stamp duty, as it involves the registration of the mortgage itself, and not the property or land being purchased.
N
Negative Gearing: This occurs when the costs to maintain an investment property (interest payments, rates, maintenance etc.) exceed the incoming rent on the property, leading to a reduction in taxable income.
Net Income: Money earned by a person or company, after tax.
Non-conforming Loans (also known as ‘Sub-prime Lending’): Loans that cater for those who can’t meet the standard income verification and credit history criteria which the mainstream lenders require. More often than not non-conforming loans incur higher interest rates.
O
Offset Account: A savings account which is linked to a mortgage in such a way that the interest earned on this savings account is applied to reduce the interest on the mortgage. Offset accounts can help reduce a tax liability.
P
Portability : A portable loan allows you to sell your house and move to a new one without having to refinance i.e. the borrower takes their current loan with them when buying a new home by exchanging the security held on the loan to the new property.
Prepayment: Additional payment(s) made to a fixed rate loan, in addition to the scheduled principal and interest repayments.
Principal: The capital sum borrowed on which interest is paid during the term of the loan.
Principal & Interest (P&I): A loan in which both the principal and the interest are repaid together on a regular basis.
Q
R
Redraw Facility: This facility allows someone to make additional payments into their loan (thereby temporarily reducing the amount upon which interest is charged), and to withdraw this money again for their own personal use, at a later time.
Refinancing: The process of moving an existing loan from one lender to another.
Reverse Mortgage: These loans are designed for retired people who own their own home but have little cash to live on. A reverse mortgage allows such a person to borrow against the value of their home and access the equity without having to sell the property. No repayments are required during the loan term with the total interest, fees and charges being taken out of the estate on the borrower’s death.
S
Stamp Duty: A government tax on the purchase of land or property, payable by the buyer. Stamp duty varies from state to state, and first home owners may be eligible for concessions in some states. Stamp duty paid may be taken into consideration with regards to capital gains tax, should the buyer sell at a later stage.
Section 32 (also known as the ‘Vendor’s Statement’): A legal document (usually prepared by the seller’s solicitor) detailing material particulars regarding the property in question.
Security: An asset that protects a lender’s risk until the loan is fully repaid.
Servicability: This is a calculation which takes into account the buyer’s ability to make payments on the loan, with regards to their other financial commitments (rent, food, general living expenses, credit card repayments etc.)
Settlement: The date in which all remaining funds are handed over to the vendor, and the buyer takes complete legal ownership of the property. If a property in being refinanced, then the settlement date is the date in which all funds are handed over from the new lender to the previous lender.
Split Account: An account in which different types of interest are paid on different portions of the account; for example a fixed rate of interest being calculated on part of the loan amount, and a variable rate of interest on the remaining amount.
Sub-prime Lending (also known as ‘Non-conforming Loans’): Loans that cater for those who can’t meet the standard income verification and credit history criteria which the mainstream lenders require. More often than not non-conforming loans incur higher interest rates.
Switching Fee: A fee charged by some lenders for changing the interest rate or the type of repayments, or to increase the amount of credit except by way of redraw.
T
Tenants in Common: The equal or unequal holding of property by two or more persons. If one person dies, then the title reverts to the survivor(s), irrespective of the deceased’s will.
Title Deed (Also known as a ‘Certificate of Title’): A certificate which issued by a government body and which describes a title reference to a particular parcel of land, the registered owner of that land and any encumbrances registered against the title.
Title Search: An examination to confirm that the vendor has the right to sell a property and that there are no encumbrances on the property.
Torrens Title: A title in which all previous and current owners are listed on the one deed, as are all previous mortgagees etc. This kind of title is also commonly known as a ‘Certificate of Title’ or ‘Deed of Grant’.
U
Unconditional Approval (also known as Formal Approval): Unconditional Approval is given when the loan has been approved by both the mortgage insurer and the lender. In order for unconditional approval to be granted, the buyer needs to have made a formal written offer on a property or piece of land, which has there-after been valued by the lender.
Unencumbered: A property of parcel of land which is free from liabilities, restrictions or mortgages.
Uniform Consumer Credit Code (UCCC): Legislation which regulates credit provided to personal customers and strata corporations and which provides uniform standards for all forms of customer lending. It is designed to protect the rights of the individual (personal consumer) by ensuring banks and other financial institutions all adhere to the same rules when providing personal, domestic or household credit.
V
Valuation Report: This can be prepared by an independent valuer, or by a valuer employed by the lender. The value is a property is based on such factors as median house prices for a given area, recent sales, and the size and condition of the property itself. A valuation report is often the final stage in a lender granting unconditional approval for a loan.
Variable Interest Rate: An interest rate that varies during the term of the loan, in accordance with the rates in the marketplace. A variable interest rate can fluctuate over the term of the loan and is not locked in for a specified period.
Vendor: The party who is selling a property.
Vendor’s Statement (also known as a ‘Section 32’): A legal document (usually prepared by the seller’s solicitor) detailing material particulars regarding the property in question.
W
X
Y
Z
wealthwithproperty 