Glossary: Home loan terms

Amortising loan
A loan in which the principal and interest will be repaid fully through regular installments by the time the loan’s term ends.

Application
The first step in the official loan approval process; this form is used to record important information about the potential borrower necessary to the underwriting process.

Application fee
This fee is paid by the customer for setting up the agreed loan.

Appraised Value
The estimate of a property’s value offered as a security for a home loan. This is for lending purposes only.

Average Annual Percentage Rate (AAPR)
It is designed to show customers the total cost of credit, including the stated interest rate plus certain finance and service charges.

Basic Home Loans
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.

Basis points
A basis point is one hundredth of a percentage point. Thus a 0.20% rise in interest rates is described as a “20 basis point” increase.

Break costs
Penalty charges for ‘breaking’ or discontinuing the fixed term of a loan.

Bridging finance
This is a temporary loan which allows a buyer to complete the purchase of a new property before selling their existing property. It is also useful for borrowers who want to finance the building of a new home while still living in the old one.

Comparison rate
Reveals the cost of the loan; it takes into consideration the costs associated with setting up the loan including the interest rate, the loan approval fee and any other up front or ongoing fees. It excludes government fees and charges.

Conveyancing
The legal transfer of property ownership from the seller to the buyer in most cases it is performed by either a solicitor or conveyancer.

Credit Reference or Credit Report
A report usually conducted by lenders on the credit history of the borrower. Lenders must obtain the borrower’s permission in writing before obtaining a credit report.

Credit limit
The maximum loan amount that you can borrow under a home loan contract.

Drawdown
The accessing of loan funds provided by the lender.

Default
This is when a borrower fails to make a loan repayment by a specified date.

Deferred Establishment Fee
This is also called an exit fee. It is charged by the lender when a borrower refinances out of the lender’s loan.

Deposit
An amount of money that the customer contributes to the purchase of a house.

Deposit Bond
A substitute for a cash deposit to assist the purchaser of a property.

Disbursements
3rd party costs incurred when settling a loan ie stamp duties, solicitor costs, mortgage costs, mortgage insurance costs, title searches and transfer of title.

Discharge fee
The one-off fee charged when the final repayment is paid.

DSR – Debt Service Ratio
Maximum of the applicants weekly, fortnightly or monthly wage that will support the loan repayments over the loan term. More often than not is expressed as a percentage and most lenders set a maximum between 30% and 33%.

Equity
The amount of an asset that is owned, that is the value of the property less any outstanding loans secured by the property.

First Home Owner Grant
A Federal Government grant given to first home buyers.

Fixed interest rate
An interest rate that is “locked in” for a specified period. Usually 1, 2, 3, 4 or 5 years.

Fortnightly Repayments
Payments made on the loan every 2 weeks.

Guarantee
Where a third party (the guarantor) agrees to take responsibility for the loan if the original borrower is unable to pay.

Honeymoon or Introductory Rate
A low interest rate offered at the start of a loan. At the end of the specified time period the interest rate converts to a standard rate.

Interest only loan
A loan where the borrower only pays off the interest on the loan but not the principal.

Lenders Mortgage Insurance (LMI)
Insurance taken out by the lender to protect itself if the customer defaults. Generally if the customer borrows more than 80% of the home’s value the LMI will need to be paid by the borrower. LMI does not offer any protection to the borrower.

Line of Credit
A fully functional transaction account that has a credit limit attached to it. The borrower can generally withdraw funds at any time, up to the credit (or facility) limit. (If the credit limit is attached to more than one account, the borrower may only be able to draw up to the account limit on each account.) There is usually no fixed repayment schedule; however, the borrower is usually required to make payments to at least cover the interest and fees on the loan.

Loan to Value Ratio (LVR)
The total amount of the loan divided by the appraised value of the property. For example, if a property is valued at $400,000 and the loan amount is $320,000 then the LVR is 80%. If the value is greater than 80% Lenders Mortgage Insurance may need to be taken out.

Low doc loan
A loan process generally for self-employed people who do not have the standard financial statements required to obtain a loan.

Lump sum payment
A one-off payment made outside of the set repayments.

Mortgage
The Legal document giving a lender an interest over a property to secure the payment of money.

Mortgagee
Someone who lends money on the security of a mortgage. i.e. Bank

Mortgagor
Someone who borrows money on the security of a mortgage. i.e. Customer

Mortgage offset
An offset account is simply a savings account linked to your home loan account. An offset account works like a regular savings account with the big difference in that the balance in the savings account is offset against that owing on the mortgage.

Non-conforming loans
Non-conforming loans are designed for borrowers that do not meet ‘standard’ bank criteria and may include small or no-deposit holders , contract or seasonal workers, non-residents or even those with a poor credit history.

Non Resident
Helps borrowers purchasing property in Australia that don’t themselves reside or pay taxes here.

No Ongoing Fees
No hidden fees added into the monthly repayments.

Offset
Offset accounts are a separate savings account attached to your home loan. The interest rate on the offset account is the same as on the loan. Any money you put in the offset account is deducted from your loan balance before interest is calculated.

Owner Occupier
A person who lives in a house that he or she has bought.

Portability
Borrowers can take their current loan with them when buying a new home by swapping the security held on that loan to the new property.

Pre approval
Initial process of approval providing an estimate of how much someone can borrow based on the information provided to the bank.

Principal
The amount owing on the loan. Interest is calculated based on this amount.

Principal and interest loan
A loan where the repayments are made up of principal and interest.

Professional Package Home Loan
Professional rate products are hard to beat if you qualify. They provide you with a very competitive rate along with all the features most borrowers are wanting today. Offset accounts are available on all Pro – Pac loans allowing for mortgage minimisation at a cheaper rate than normal.

Progressive drawdown
Some loans allow the loan amount to be withdrawn in smaller amounts rather than in one big hit. This suits customers building a house because they don’t need to withdraw the entire loan amount.

Redraw
This is when you withdraw extra money that you’ve paid into your variable rate home loan. The amount simply gets added to the amount you owe. You can redraw as you need, as long as you have available funds in the loan.

Refinancing
Transferring to a new loan with better interest rates or conditions by paying out the old and establishing a new one.

Residential Investment
Property for the purposes of Investment and not lived in by the owner

Reverse mortgage
Loans that are for retired people who own their own home but have little cash to live on. It allows them to borrow against the value of their home without having to sell it. No repayments are required during the loan term with all interest, fees and charges being taken out of the estate on the borrower’s death.

Settlement
Money paid in full less the deposit in exchange for title documents and the right to take possession of a property.

Split loans
Give you the flexibility to structure a home loan in a way that best suits your situation. You can fix a portion of your home loan so that you have certainty with your repayments and have the other portion on a variable rate.

Stamp duty
The state government duty paid by the buyer when a property is sold.

Term
The length of the home loan.

Upfront fee
Fees charged by the lender in getting the loan application processed.

Vacant Land
Land that may be developed and improved upon but currently has no dwelling on it.

Variable interest rate
An interest rate that can fluctuate over the term of the loan and is not locked in for a specified period.