Home Loan Glossary

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

A
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.
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.
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.
Australian Business Number (ABN)	A unique identifying number for all businesses in Australia.
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.
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.
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.
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 ownership for a unit/flat/apartment in a building that is owned by a company. A purchaser buys certain shares in the company, which gives the purchaser the right to occupy a specific unit/flat/apartment.
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.
Conditions precedent	Conditions that must be achieved before a loan or formal loan approval can be provided.
Construction	Refers to building on vacant land, a house and land package or property additions or major renovations.
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.
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.
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 enquiries made by lenders for credit applications • current and completed credit facilities • monthly repayment histories • overdue accounts, defaults and serious credit infringements • court judgements • directorships • bankruptcy/debt agreements/personal insolvency.
Credit score	A numerical representation of an individual’s credit ‘rating’ calculated using the information contained in the credit report. Different credit reporting agencies use different rating scales.
Creditor	A party to whom money is owed.
D
Daily interest	Interest calculated daily on the outstanding balance of the loan or investment account.
Debtor	A party who owes money.
Default	Failure to perform a mandatory condition of the lending contract.
Deposit	An initial cash contribution towards the purchase of the property, usually payable on signing/exchange of contracts.
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.
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.
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	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.
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.
Establishment fee	The fee charged by the lender to establish a loan. Also known as an application fee.
F
Favourable purchase	An asset being purchased at less than market value, usually from a family member.
First Home Owner Grant (FHOG)	Various state governments provide financial grants to assist first home buyers to meet the cost of purchasing their home.
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.
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	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.
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	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.
Interest Only (IO)	An arrangement where the borrower pays the lender only the interest component of their loan obligation for a specified period.
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.
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 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.
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 Valuation Ratio (LVR)	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 (Low Doc) 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	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-conforming loan	Specialist lenders provide these types of loans to borrowers who fall outside the normal eligibility requirements of mainstream lenders.
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. Mortgage Choice Pty Ltd and Smartline Operations Pty Ltd are both members of the Australian Financial Complaints Authority (AFCA).
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’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
Power of Attorney	A formal instrument that powers one party to act on behalf of another.
Prime security	Prime security, which is usually property, is provided to the lender to secure a loan.
Principal	The sum of money borrowed and therefore owed to a lender, excluding interest and other charges.
Principal and interest loan	A loan in which both principal and interest are paid with each repayment during the term of the loan.
R
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.
Registered mortgage debenture	A security item registered at ASIC (Australian Securities & Investment Commission) that details a charge over company assets.
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
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	Finalisation of a financial transaction to start a loan. Documents and monies are exchanged to initiate the loan and formalise security.
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.
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).
Survey	A plan that shows the boundaries and the building position on a block of land.
T
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 search	A request to the Land Titles Office to ascertain the ownership of a specified property and any encumbrances, covenants and easements that may be recorded 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
Unencumbered	A property free of encumbrances or restrictions, such as mortgages and other liabilities and charges.
V
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.