se Trying to understand financial terminology for loans?

Common Terminology You’ll Hear

Here’s what the finance jargon means

Acceptance

To agree to the terms and conditions of an offer contract.

Additional Repayment

Additional money paid into your loan over and above the mnimum monthly repayments.

Application Fee

A fee paid to the lender for setting up a home loan

Appraisal Fee

A fee charged for a professional opinion about how much a property is worth.

Amortising Loan

The formal term for a standard principal and interest loan.

Arrears

Being overdue in repayments.

Asset

An item owned with a monetary value (e.g. cash and/or property).

Balloon Loan

A loan that has regular payments that do not cover the full loan amount by the end of the term, so a larger lump sum is due at maturity.

Basis Points

Equal to 0.01% interest. (e.g. 50 basis points is an interest rate of 0.5%)

Break Cost

Fees charged by the lender if the full loan is paid-off in full before the end of the loan term.

Bridging Finance

A temporary loan used as a gap measure between buying your new home and selling the old one.

Budget

A detailed review of your income and expenses.

Capital Gains

Tax payable on the profit made when selling an investment property.

Cash Advance

A loan on a personal line of credit, typically a credit card attracting a higher-than-normal interest.

Certificate of Title

Document showing who owns the property as well as all the associated details of size and whether there is a mortgage registered on the title.

Comparison Rate

A rate which includes fees and charges so loans can be compared on an equal basis (e.g. a loan with a low advertised rate but high fees might cost the same as a loan with a higher advertised rate but low fees).

Cash Advance

A variation or alteration to the terms of a contract.

Conveyancing

Legal work carried out by your legal representative to transfer owneership of a property.

Credit

An agreement whereby the borrower receives goods or money now, on the understanding it is to be repaid under set guidelines that commonly include an interest charge.

Creditor

A person or organisation who loans money on the expectation it is to be repaid.

Credit/Facility Limit

The maximum loan amount that a borrower can borrow under their home loan contract.

Credit Report

A report outlining an individual’s credit history, public records and any credit black spots.

Daily Interest

Interest calculated on a daily basis.  Most variable rate loans calculate interest on a daily basis.

Debit Card

A bank access card used to make withdrawals from current funds in a bank account.

Debt

An amount of money owed by one person or organisation to another.

Debt Consolidation

To combine one or more debts previously held seperately into one merged amount.

Debt Servicing Ratio (DSR)

The Debt Servicing Ratio measures whether you can afford the mortgage payments.  To calculate the DSR, the lender uses a number of factors to work out the amount of your income that is available to repay the debt.

Default

Failure to make a loan repayment by a specified date.

Deferred Payment

An agreement between two parties where an amount due to be paid on a given date may be postponed until a later date.

Deposit

Amount given in advance to show intention to purchase a property.

Deposit Bond

An insurance policy to cover the deposit on a property being purchased.

Depreciation

The amount claimed on an investment property for the reduction in value of an item due to usage, passage of time, wear and tear.

Exit Fee

A fee charged by some Lenders when you decided to refinance with another lender within the first years of the loan.

Equity

The difference between your mortgage and your property’s value.

Fixed Interest

Your interest rate is locked in for a fixed term, you are then protected against possible interest rate rises for the selected ‘fixed’ term period.

Foreclosure

When you default on your mortgage and the Lender forces a sale on your property, with the proceeds going towards the mortgage debt.

Gearing

Investment property is negatively geared when expenses exceed rental income.  Investment property is positively geared when the rental income receivd is greater than the total amoutn of epenses.

Hardship Variation

It may be possible to vary the terms of your contract should you find yourself in a position where you are having difficulty meting your repayment obligations.

Lender

A person or organisation who provides money to another under the proviso that it will be repaid according to set guidelines and terms.

Lender’s Mortgage Insurance (LMI)

Lender’s Mortgage Insurance is a one-off insurance premium that protects the lender in the event that you default on your mortgage repayments.

Liquid Assets

Are assets, either in case or easily convertible to cash.

Loan to Value Ration (LVR)

The value of the loan divided by the value of the property that the loan is for (e.g. if you buy a $500,000 property and need a $350,000 loan – your LVR is 70%)

Low-Doc Home Loan

Low documentation loans designed for the self-employed who don’t have the documentation required to get traditional home loans.  These usually carry higher interest rates.

Mortgage

A loan for the purpose of purchasing a property, where the property is used as security.

Mortgagee

The lending institution.

Mortagor

The borrower (you).

National Consumer Credit Protection (NCCP)

Australian legislation covering consumer protection and consumer rights.

Negative Gearing

Where the income from an investment property is insufficinet to meet the interst costs of the loan used to fund the investment property.

Non-Conforming Loans

Designed for those who find it more difficult to meet the borrowing conditions of standard home loans.

Offset Account

An offset account is an account linked to your mortgage.  The balance in the account ‘offsets’ the principal of the loan.  Overall interest is calculated on the principal less the offset account balance.

Ombudsman

Independent body established within a particular industry to investigate and resolve disputes as an outside party to the dispute.

Overdraft

An arrangement on a cheque or savings account under which a Lender extends credit up to a maxium amount and against which the customer can make withdrawals.

Pre-Approval

An initial approval pocess that provides an estimate of how much someone can borrow before they find a property.

Principal

The amount of capital borrowed.

Refinance

Switching your loan from one product (or lender) to another, usually with better interest rate or conditions.  Your initial loan is paid out and your debt is transferred across to the new product or lender.

Repossess

To reclaim possession of goods or assets for failure to make payments within agreed terms.

Reverse Mortgage

Usually for older home owners who have already paid off their home loans and borrow against the value of their home without having to sell the property.

Revolving Line of Credit

A line of credit that is secured by the value of your home.  Allows you to use the funds for other purposes such as the purchase of a second property or other investments.  Generally incurs a higher interest rate than a standard variable rate loan.

Security

A right of a lender against the property or other assets of a borrower to guarantee or secure the repayment of a loan.

Secured Loan

In this type of loan, the property being purchased is held as security against the loan.

Settlement

The day on which the process of changign title of a property occurs.  Your legal representative will organise for the exchange of money and documents so that you become the legal owner of the property.

Split Loan

Home loans where a predetermined portion of the loan is locked in at a fixed interest rate and the rest comes with a variable rate of interest.

Unsecured Loan

A loan in which no property is held as security, generally attracting a higher rate of interest due to increased risk on the part of the lender.

Valuation

An estimation of the value of the property prepared by an independent professional valuer.

Variable Interest Rate

The interest rate will vary depending on several factors, including the Reserve Bank’s current cash rate and prevailing sentiment.

Vendor

The person who is selling the property.