Glossary of Terms
AAPR - the average annual percentage rate (AAPR) wraps up interest payments and fees and expresses all these costs in one rate. It is designed to reflect the total annual cost to a borrower of a loan. All lenders must disclose this benchmark rate in their advertising of home loans and personal loans from July 2003. In Australia, the AAPR is officially called the 'Comparison Rate'.
Account keeping / administration fee - ongoing fee charged by the lender for administration of the account.
Application fee - A fee paid by the borrower for the processing of the loan & mortgage documents. donnaho
Approval period - The length of time the approval is available to be taken up before the offer is withdrawn.
Arrears - When a loan is behind in the normal repayment schedule. It is possible that a different interest rate is charged when a loan is in arrears.
Arrears fee - A charge for administering the arrear position.
At call - 'At call' refers to savings in accounts that can be accessed at any time and is not locked away for a specified period as with term deposits. In practice, this unlimited access may be restricted by the opening hours of the financial institution or the type of withdrawal access it offers. Institutions may take up to 24 hours to process withdrawals (eg. some cash management trusts) or offer true instant access via ATMs and internet banking)
Bank - A financial institution generally offering a wide range of financial services. Regulated by legislation (Commonwealth and State). Funds are raised from various sources but regulated by the government.
Basic Rate - applied to loans commonly called "No Frills Loans" which are generally cheaper than Standard Variable Rate Loans but do not have features such as a redraw facility or mortgage offset.
BPay - BPay is an Australia-wide electronic bill payment service, offered by most financial institutions. It enables consumers to pay bills to a range of businesses registered with the service via their phone banking or internet banking account. Customers use a unique Biller code for each business and an allocated reference number for their bill. Funds come out of their credit card or savings account. Payments can be made 24 hours, 7 days a week which are then processed either the same day or the next day. A similar rival scheme set up by Australia Post is called POSTbillpay.
Break cost - this purely relates to the situation where you decide to discharge or payout a loan DURING the fixed term of a fixed rate loan. For example, you enter a 3 year fixed rate loan and need to pay out the loan (eg, you sell your property) after 1 year. There may be a cost passed on to you which compensates the lender for any "economic loss" suffered by the lender due to you breaking the fixed term. These calculations can be complex to understand.
Building Society - A financial institution generally offering a wide range of financial services. A co-operative owned institution raising funds from individuals & the wider market.
Capital gain or loss - The difference between the current value of the asset and the amount you paid for it.
Caveat - A warning that there is another interested part in a property. These can be found through property / title searches
Commercial loan - a loan which is either secured by commercial property or where the funds are used for the purpose of purchasing a commercial property or some other commercial purpose.
Community title or Company title - Consists of a one owner either a company or group in
which units / shares are purchased as part of the property. This has become less common.
Comparison rates -lenders and brokers must disclose a benchmark comparison rate in their advertising of home loans and personal loans since July 2003. This Comparison Rate is designed to reflect the total annual cost to a borrower of a loan. It wraps up interest payments and fees and expresses all these costs in one rate, or the average annual percentage rate (AAPR).
Conditional Approval - Approval subject to certain conditions. Once the conditions are satisfied a full approval or "unconditional" approval may be obtained.
Construction loan - Where the funds are predominately being used for the construction of a home.
Contract for sale - A legally enforceable contract for the transfer of ownership of property relating to the sale of the property. The format for a contract differs in each State or Territory of Australia.
Cooling off period - A predetermined time between a deposit has been paid & contracts being signed. This gives the parties concerned time think about their decision. These are different in each State or Territory in Australia. It is very important that you understand your cooling off period before signing anything.
Credit Union - A financial co-operative supervised by the Australian Financial Institutions Commission. Generally funds come from an individual, community or employment.
Default - Where the normal repayment has not been made on the specified date.
Deferred Establishment / Application Fee - Some lenders discount the application fee but will charge the full fee should the loan be repaid prior to a predetermined length of time set by the lender.
Deposit bond - a tool used to facilitate the exchanging of contracts. Instead of providing a 10% deposit which sits in a "trust" account during the settlement period, the purchaser takes out a deposit bond. It is like an insurance policy. It allows insurance for the vendor, that if you don"t complete the purchaser, they will still receive their 10%.
Delayed settlement - When both parties to agree to a settlement date beyond the normal period days. This can differ in each State or Territory in Australia.
Direct debit - An electronic payment taken automatically from a customer's bank account by written agreement between the account holder and a goods or service provider. The amounts and dates may vary from payment to payment. Eg, monthly, quarterly or annual bills.
Early discharge fee - Should you wish to repay a loan earlier than agreed a penalty may be incurred. Generally this penalty refers to a fixed loan.
EFTPOS - Electronic Funds Transfer at Point Of Sale. Means of payment whereby debit card holders can pay for purchases by electronic debiting their savings account.
Establishment fee - A fee paid by the borrower to establish the loan & mortgage.
Exchanged contract - when both parties sign the contract (agreement) to purchase the property & generally a deposit is handed over at this exchange.
Fixed rate - Generally you are able to lock in a rate from 6 months to 10 years. Your interest rate and repayments are locked in during the fixed term. Heavy break fees may apply should you wish to exit the fixed rate before the end of the chosen term.
Home loan - A loan taken out to assist with purchase a home and land, refinance a home for owner occupation or investment or any other worthwhile purpose. Generally using a residential property as security.
Interest only repayments - A repayment system where you are not required to repay any principal of the loan. The repayments are for the interest component of the loan only - generally for the previous month. Very popular with investors who have both a home loan and investment loans.
Introductory or Honeymoon rate - Discounted or rate for a specified period of time (usually 3-12 months) to entice you to borrow from a lender. At the end of the honeymoon period the interest rate generally reverts to the standard variable home loan rate.
Investment loan - Where the property is used to gain income &/or capital gain. A tax benefit may apply - our advice is to consult your accountant for further assistance.
Joint nomination - Where 2 or more applicants can nomination 1 person to receive copies of any notice or documents. It assists with the lender sending out documentation to each borrower, applicant or guarantor.
Land loan - Where the funds are predominately being used to purchase land for eventual construction.
Lender - The person or institution granting the funds / loan. By lending funds, they accept a risk. The higher the risk, the harder the loan may be to obtain and the higher the interest rate and fees.
Lender"s legal fees - some lenders use external solicitors to draft documentation to a home loan / mortgage. Some lenders pass this cost on to borrowers.
Lenders mortgage insurance - this is an insurance policy taken out by the lender which protects the lender. In instances where you borrow over 80% of the value of the property, the lender will generally pass the cost of this insurance to the borrower. The insurance is for default purposes only. If the loan defaults there may be a shortfall between the amount recouped from the sale of the property & the amount owing to the lender. The mortgage insurance in most cases will pay the difference.
Line of credit - A flexible loan similar to an overdraft where you have a maximum limit and you only pay interest when you draw funds down (interest is only calculated on the amount drawn NOT the funds available). The account operates as a day-to-day account.
Loan to value ratio (LVR) - The $ loan amount divided by the value of the asset being used as security. For example - a loan of $200,000 secured by a property worth $500,000 gives an LVR of 40%. The higher the LVR, the higher the perceived risk of the deal. Also, when an LVR is above 80% - Lenders Mortgage Insurance becomes involved (see separate definition)
Mortgage - this is a tool / instrument which allows security to be taken over an asset / property given to a lender when they lend you money.
Mortgage registration fee - State Government fee payable for the transfer of title; discharge of mortgage; registration of mortgage; registration of a caveat; discharge of a caveat & other registrations such as leases.
Mortgagee - The person or institution granting the funds take out a mortgage to protect their investment.
Mortgage Stamp duty - State Government duty payable on the borrower"s mortgage. The borrower generally pays the duty. The amount of duty varies from state to state.
Mortgagor - Person providing the security (usually the borrower or a guarantor)
Negative gearing - effectively means loss through borrowing. It is an investment strategy whereby an asset is purchased and its related income and expenditures result in a net loss which deducted from your taxable income therefore reducing your tax payable.
Non-conforming loans - so called 'non-conforming' finance refers to loans that cater for those who can't meet the standard income verification and credit history criteria mainstream lenders like banks and mortgage originators use for ordinary borrowers. Such borrowers include those who are self-employed, have a poor credit record or who have recently arrived in Australia. Non-conforming loans are usually at higher interest rates to reflect higher risk of these borrowers. The Non-conforming finance is also called 'sub-prime lending'.
Off the plan purchase - A purchase of a property not completely constructed & in most cases title would be unregistered.
Official Cash Rate - the Official Cash Rate is the interest rate set by the Reserve Bank of Australia and used to influence the general level of interest rates in banking and the economy. Changes to the cash rate, also termed "official interest rates", flow on to variable home loan, personal loan and credit card rates within weeks.
Offset account/Mortgage offset - offset accounts can help reduce your tax bill by offsetting taxable income from deposit accounts against interest paid in after tax dollars on mortgage repayments. However, not all offset accounts are equal, with many not paying the same interest as you are charged on your mortgage.
Old system title or Common law title - Consists of each transaction listing all ownership
& mortgage transactions since the property"s origin. Not very common.
Originator - A non-bank lender generally offering better interest rates than banks. Funds generally come from money market or mortgage trust etc. not from bank funding.
Owner Occupied loan - where the owner lives & uses the property for their enjoyment.
Portable Loans/Portability - a portable loan allows you to sell your house and move to a new one without having to refinance. This saves application and legal fees. Most lenders however insist that the loan amount is the same or less. Make sure you know the terms of your loan.
Positive gearing - It is an investment strategy whereby an asset is purchased and its related income and expenditures result in a net profit which is added from your taxable income therefore increasing your tax payable. The fact that you are generating positive income may enable you to purchase additional investment assets.
Pre-approval or Approval in Principal - Approval of a loan subject to certain conditions generally used to ensure you qualify for a loan prior to bidding or searching for a property to purchase. We recommend that you do not sign a contract of sale until you have unconditional approval, but always check with your solicitor / conveyancer first.
Principal and interest repayments - A type of repayment where the accrued interest & a portion of the principal are calculated on the term, interest rate & loan amount. Repayments are made by regular instalments either monthly fortnightly or weekly.
Privacy Act - Is a law to protect the consumer in regards to their privacy from information being shared about a consumer. By signing the Privacy Act Authority it gives the lender authority to access credit reports or credit reference associations.
Public Trustee - A body (semi-government) set up to monitor the wishes of a public member on behalf of the beneficiaries.
Redraw facility - a redraw facility allows you to have access to additional loan repayments you have made above the minimum requirements. Generally this facility is available for variable rates only.
Right of way - A restriction placed on the title of the land generally pertaining to shared
driveway or access driveways.
Searches - Enquiries made to confirm ownership, encumbrances & restrictions on the property.
Securitisation - Converting an asset such as a home loan into a marketable commodity by pooling & selling mortgages.
Security - An asset used as a guarantee of a loan.
Serviceability - The calculation using income & various deductions to ensure the borrower
can afford or able to meet the home loan commitments. A lender generally allows for interest rate rises in determining whether loan is serviceable.
Settlement or Completion - This is the time when the money and the property changes hands. All final payments are made for the transfer of ownership of the property. This is when the lender receives the transfer & title deed & discharge of any existing mortgages. Generally the keys to the home are handed over at this time.
Standard variable rate - Most common rate charged by lenders. Generally linked to the official cash rate that can fluctuate (rise and fall) due to the economic conditions.
Strata title - Right of title or ownership of a section or "unit" of a larger building.
Sub-prime / credit impaired lending - 'Sub-prime lending', also called 'non-conforming' loans, refers to loans that cater for those who can't meet the standard income verification and credit history criteria mainstream lenders like banks and mortgage originators use for ordinary borrowers. Such borrowers include those who are self-employed, have a poor credit record or who have recently arrived in Australia. Non-conforming loans are usually at higher interest rates to reflect higher risk of these borrowers.
Substitution of security - When a property or cash of equal value replaces a security for more than the LVR required.
Switching Fee - the lender may impose a switching fee where an existing borrower wishes to change from one loan type to another e.g. Variable Rate Loan to Fixed Rate Loan
Term - The length of time a loan or the predetermined length of time within the loan.
Term Deposit - fixed-term deposits are savings accounts which offer higher rates of interest in return for committing funds for a set period. The longer the term, the higher the rate of interest. Money in a term deposit cannot be withdrawn at any time like a standard "at call" savings account.
Title deed or certificate of title - The document proving ownership & displays financial encumbrances & restrictions on a specified property.
Torrens title - The right of title or ownership of the property.
Transfer stamp duty - Government duty payable on the contract of sale.
Uniform Consumer Credit Code or CCC - the "Credit Code" is a body of legislation designed to protect borrowers whose purpose for borrowing money is for private or domestic purposes. It is the duty of all lenders and lending brokers to ensure that the provisions of the Code are being complied with when providing credit of this nature.
Valuation or evaluation fee - A fee paid for a professional opinion of the value
of a property.
Vendor - The seller
Zoning - Local authority guide as to the permitted uses of the land & construction on said land
