Terms and Definitions
A
AAPR a.k.a. COMPARISON RATE
This is a percentage rate which takes into account the overall costs of a loan including the lender’s advertised interest rate, its set up fees and its on-going fees. Every lender must supply a Comparison Rate for each of its loans to enable consumers to more accurately compare different products. But beware! Not all fees are included.
Amortisation
The payment of debt in regular instalments over a period of time.
Approval in Principal
This means a borrower meets a lender’s initial criteria and is eligible for a loan. Further conditions will still need to be met.
B
Basic Rate Loan
These loans generally have a lower interest rate, but lack many of the options of other loans.
Break Costs
Fees charged for early the repayment of a fixed term loan.
Bridging Loan a.k.a. Relocation Loan
This is a short-term loan usually used by borrowers to bridge the period between selling one property and buying another.
C
Capitalizing Interest
Rather than making repayments the borrower adds the interest back on to the loan, so increasing its size. This facility is often used for bridging and construction loans.
Capped Rate Loan
This is a loan which, which for a guaranteed period, will not exceed a guaranteed interest rate.
Collateral
This is an asset or part asset used to guarantee a loan and protect a lender’s interests.
CRS
Comparison Rates Schedule (See AAPR)
D
Deposit Bond
This is a guarantee that a deposit will be paid by an agreed date. Deposit bonds are purchased from companies which specialise in them and to whom borrowers are liable if the guarantee is not met.
DEF a.k.a. Deferred Establishment Fee
A fee sometimes charged if a loan is paid out within 3 to 4 years of its establishment.
Discharge Fee
A fee lenders charge to cover the costs of finalising an account once the loan is paid out.
DSR – Debt Service Ratio
This is the percentage of a borrower’s income which is available to make loan repayments for the term of a loan.
E
Equity
This is the amount of a property which is not covered by debt.
Establishment Fee
A fee charged by a lender to cover the costs involved in setting up a loan.
Exit Fees (See Break Costs & DEF)
F
Fixed Rate
A set interest rate for an agreed term.
G
Guarantor
An individual liable for a borrower’s debt.
H
Home Equity Loan
A loan borrowed against the equity in your home.
Honeymoon Rate
This is usually a loan with a low interest rate for an agreed period which reverts to a standard variable rate once the period is passed.
I
Interest Only Loans
This loan requires that only interest repayments are made.
Introductory Rate (See Honeymoon Rate)
L
Line Of Credit (See Home Equity Loan)
Loan-to-Value Ratio (LVR)
This is a ratio of the loan compared with the value of the property. In other words, how much is owed v how much is owned. It is often used to measure a borrower’s equity in a property.
Low Doc Loan
Low Documentation loans are used by borrowers who cannot provide proof of income to apply for standard loans. These loans are primarily for the self-employed and usually require just a declaration of income.
M
Mortgage Insurance (LMI)
This is to protect lenders from borrowers who default on loans. LMI is generally charged for loans of more than of 80% of the value of a property. In the case of Lo Doc loans, LMI kicks in if borrowing is more than 60% of the value of a property. In both cases, the higher the LVR; the higher the insurance premium.
Mortgagee
The borrower.
Mortgager/Mortgagor
The lender.
N
No Doc Loans
Loans available for the self employed, who might not have financial information readily available. Borrowing conditions are often more stringent than for lo doc loans.
Non-conforming Loans
Loans available to those without a good credit history.
P
Portable Loans/Portability
These loans may be transferred to another property allowing an owner to move house without having to reapply for a new loan or pay off the old one.
Pre-Approval
This generally means a borrower fits a lender’s criteria and if certain other specified conditions are met the lender will proceed to formal approval.
Principal
This is the total amount of the original loan left to pay.
Principal & Interest Loan
Most loans are P&I which means that with every instalment a portion of the principal is paid off as well as the interest on the loan.
R
Redraw Facility
This allows you to make additional repayments that you can borrow again at a later date.
Reverse Mortgage
A mortgage designed for retirees who own their own home and wish to borrow against it. In this case, no repayments are necessary with the total amount owing to the lender being obtained upon the death of the borrower or the sale of the property.
S
Serviceability
All lenders need to know that a borrower can repay the loan at the agreed amount over the agreed time. The evidence of this is generally obtained using a lender’s serviceability calculator.
Split Loan
Borrowers can have two or more different loan types under the umbrella of a single loan such as part fixed and part variable.
Stamp Duty
A state government tax.
Standard Variable Rate
The rate a lender applies to their standard product with basic features such as portability, redraw facility and an offset facility. This is the rate to which most fixed and intro rate loans revert.
Switching Fee
A fee charged when the borrower changes the type of their loan such as switching from a fixed rate to a variable rate.
T
Tenants in Common
When two or more persons each own a portion (either equal or unequal) of a property. Unlike joint tenancy, in this case, if either owner dies, ownership of their portion of the property does not revert to any other owner but instead is distributed according to their will or the law.
U
Unconditional Approval
While a lender generally reserves the right to withdraw a loan at any time, unconditional approval means a borrower has passed all the tests necessary to qualify for a loan and the lender is prepared to make a written offer to lend the money.
V
Variable Interest Rate
A rate that varies in accordance with current market trends.