Useful Loan Terms

Useful Loan and Property Terms

Bridging finance: A short term loan that is taken out to purchase a new property before the sale of your existing property commences, this does mean you will have to carry the weight of two mortgages at once.

Break cost: Relates to fixed rate loans where the loan contract is terminated/finalised before the expiry of the fixed rate period

Certificate of title: This document shows important information such as land dimension, ownership details, and whether there are any encumbrances.

Commission: The amount payable to the broker from lender for services performed, usually based on a percentage of the loan amount

Comparison rates: A comparison rate is a tool to help consumers identify the true cost of a loan. It is a rate which includes both the interest rate and the ascertainable fees and charges relating to a loan.

Contract Of Sale (COS): A written agreement outlining the terms and conditions for the purchase and or sale of a particular property

Cooling off period: A period of time after signing of contracts takes place, during this time the contracts may be cancelled.

Credit Report: A document used to look over your credit history and to examine your use of credit. It provides information within the last 12 months on how many finance applications applied for, current loans in place with credit institutions and your payment history and will show any defaults.

Credit Score: A tool used to value and rank an individual’s credit risk at a given point in time based on a statistical evaluation of information in the individual’s credit file that has been proven to be predictive of loan performance.

Default: Failure to meet mortgage repayment on due date, therefore resulting in a payment default.

Deposit: A portion of the purchase price payable by the purchaser at the time of exchanging contracts on the purchase of a property.

Depreciation: The value of which the property decreases from the time you made the purchase.

Drawdown: Debiting of the agreed amount of loan funds at settlement by the lender.

Discharge fee: This fee is charged and payable when a loan is discharged/finalised.

Equity: The difference between what your mortgage is and what your property is currently worth, backed up by valuation not by what an agent believes this is worth.

Fixed Interest Rate: An interest rate product that allows you to lock in an agreed upon rate for a set amount of time, after this time the rate will revert to the current standard variable rate (SVR)

Formal Approval: The stage of the loan applications process where the lender formally approves your loan application and you are approved with no other conditions to meet.

Home Insurance/Certificate Of Currency: An insurance policy that is put in place to cover your financial interest and the lender from a disaster such as fire or flood or a liability, such as an injury to a visitor to your home; or damage to your personal property, such as your furniture, clothes or appliances.

Interest only loan: A chosen loan term arrangement between 1 and 5 years whereby payments are payable only on the interest not including the principal repayment.

Line of Credit loan (LOC): Line of Credit loans are loans that can also be known as a revolving line of credit. The loan repayments for this type of facility are based on the money you actually utilise and you are only required to make interest only repayments.

Loan to Value Ratio (LVR): This is the measure of the amount of the loan compared to the value of the property. For example, if you have borrowed $160,000 and your property is valued at $200,000, the LVR would be 80%

Lender’s Mortgage Insurance (LMI):  A fee charged by lenders for loans which have less than 20% deposit at time of purchase. If your total Loan to Value Ratio (LVR) exceeds 80% then LMI is payable however if your LVR is 80% or less then it is not charged.

Mortgagee: The institution who lends the money

Mortgage Broker/Finance Broker: An individual that provides a service for borrowers and lenders together for the purpose of loan origination. A mortgage broker works for the client researching the most suitable finance option to suit the short and long term goals and will put through the application working as the middle man between the client and the lender totally independent of any lender.

Mortgagor: A person who borrows the funds from a lender.

Ombudsman: The Ombudsman provides an avenue through which customers can make complaints about their credit provider and have them dealt with independently once all necessary avenues have been covered.

Offset Account: Helps reduce interest costs on a loan by linking the loan to a deposit account. The balance in the transaction account ‘offsets’ the loan principal. Interest is then calculated on the loan principal minus the balance in the account.

Pre-Purchase Pest Inspection: An inspection of a home by a professional pest inspector to determine whether a property has termite infestation, termite damage or other rodent issues.

Pre-approval: When a lender or your broker advises you in writing how much a lender will lend you, subject to meeting the criteria for the terms and conditions.

Pre-Purchase Building Inspection: An inspection of a home by a professional building inspector to determine the overall condition of the property. The inspection should include an evaluation of any issues regarding the plumbing, heating and cooling systems, roof condition, electrical issues and foundation problems.

Principal & Interest (P&I) loans: A loan where both the Principal and Interest are repaid during the term of the loan.

Rate Lock: An agreement in which a lender offers “rate lock” or guarantees an interest rate for a specified period of time prior to settlement, there is a fee payable for this feature and the method is calculated differently for each lender.

Redraw facility: A feature of a home loan that allows you to access any additional funds or repayments you have made on your loan.

Refinancing: Where you as the homeowner move your home loan from one lending institution to another usually for cost effective savings.

Settlement: Where the sales transaction is completed and the purchaser then takes ownership of the property. Final payments, Government charges/Stamp Duty and LMI are made payable at settlement in exchange for the ownership documents.

Service fee: Usually a fee payable either monthly or annually to the chosen lender.

Split loan: Combination of a loan consisting of a variable rate portion and a fixed rate portion making up total loan funds.

Stamp duty/Government charges: Stamp duty/Government charges is a state Government tax calculated on the final sale price of the property and is calculated on the amount borrowed

Standard variable rate (SVR): The rate which lenders apply to their ‘premium’ home loan product.

Title: A document that shows the right to, and the ownership of, property. A title or deed is sometimes used as proof of ownership of land.

Title Search: A check of the public records to ensure that the seller is the legal owner of the property and to identify any liens or claims against the property.

Underwriting: The process a lender uses to determine loan approval. It involves evaluating the property and the borrower’s ability to be able to repay the mortgage.

Valuation: A report requested by the lender showing a professional opinion of the property’s true value backed up by a detailed report.

Valuation fee: A fee charged by the lender or the independent valuation company to cover the cost of an individual to go and conduct the value of the property and obtain a professional report.

Year to Date (YTD): Year to date figure, a measure used to calculate your projected income for the year ahead taking into consideration what you have currently earned since the start of the current financial year.

If you have a question regarding anything specific in this article call 0478 538 537 to talk to your finance broker Gerry as he will be able to assist with answering any questions.